United States Securities and Exchange Commission v. Alpine Securities Corporation
Filing
174
OPINION & ORDER re: 146 MOTION for Summary Judgment on Liability filed by United States Securities and Exchange Commission: The SEC's July 13, 2018 motion for summary judgment is granted in part. The SEC has shown as a matter of law that Alpine violated Rule 17a-8 repeatedly by filing required SARs with deficient narratives, failing to file SARs for groups of suspicious liquidation transactions, and failing to maintain and produce SAR support files. (Signed by Judge Denise L. Cote on 12/11/2018) (Attachments: # 1 Exhibit)(jwh)
Case 1:17-cv-04179-DLC Document 174 Filed 12/11/18 Page 1 of 100
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
UNITED STATES SECURITIES AND EXCHANGE :
COMMISSION,
:
:
Plaintiff,
:
:
-v:
:
ALPINE SECURITIES CORPORATION,
:
:
Defendant.
:
:
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17cv4179(DLC)
OPINION & ORDER
APPEARANCES
For plaintiff United States Securities and Exchange Commission:
Zachary T. Carlyle
Terry R. Miller
U.S. Securities and Exchange Commission
1961 Stout Street, 17th Floor
Denver, CO 80294
For defendant Alpine Securities Corporation:
Maranda E. Fritz
Thompson Hine
335 Madison Avenue, 12th Floor
New York, NY 10017
Brent R. Baker
Aaron D. Lebenta
Jonathan D. Bletzacker
Clyde Snow & Sessions
One Utah Center
201 South Main Street, Suite 1300
Salt Lake City, Utah 84111
DENISE COTE, District Judge:
Procedural History............................................. 3
Background..................................................... 5
I. The Low-Priced Securities Market .......................... 5
II. Alpine’s Business ....................................... 10
Case 1:17-cv-04179-DLC Document 174 Filed 12/11/18 Page 2 of 100
III. 2011-2012 FINRA Examination ............................ 10
IV. Alpine’s Improvements of its AML Program and SAR Filing
Program ..................................................... 13
V. 2014 OCIE Examination .................................... 14
Discussion.................................................... 16
I. Regulatory Framework ..................................... 18
II. General Arguments ....................................... 29
III. Admissibility of Summary Tables ........................ 36
IV. Deficient Narratives .................................... 43
A. Mandatory Filing ....................................... 44
B. Red Flags Omitted From SAR Narratives .................. 52
1. Related Litigation.................................... 54
a. Three Customers ..................................... 58
b. Ten SARs ............................................ 63
c. Summary ............................................. 66
2. Shell Companies or Derogatory History of Stock........ 67
3. Stock Promotion....................................... 71
4. Unverified Issuers.................................... 77
5. Low Trading Volume.................................... 80
6. Foreign Involvement................................... 83
7. Five Essential Elements............................... 86
V. Deposit-and-Liquidation Patterns ......................... 89
VI. Late-Filed SARs ......................................... 96
VII. Failure to Maintain Support Files ...................... 97
Conclusion................................................... 100
Plaintiff United States Securities and Exchange Commission
(“SEC”) has sued clearing broker Alpine Securities Corporation
(“Alpine”), alleging that between the years 2011 and 2015 Alpine
repeatedly filed deficient suspicious activity reports (“SARs”)
and failed altogether to file other SARs and to maintain support
2
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files for SARs when required by law to do so.
The SEC asserts
that this conduct violated 17 C.F.R. § 240.17a-8 (“Rule 17a-8”),
which obligates a broker-dealer to comply with certain
regulations promulgated under the Bank Secrecy Act (“BSA”),
including 31 C.F.R. § 1023.320 (“Section 1023.320”), which
dictates when a broker-dealer must file SARs.
The SEC has moved for summary judgment as to liability on
thousands of violations of Rule 17a-8.
For the reasons that
follow, the SEC’s motion is granted in part.
Procedural History
The SEC filed this action on June 5, 2017.
Following an
unsuccessful effort to dismiss the action for lack of personal
jurisdiction and improper venue, Alpine answered the complaint
on September 29, 2017.
It filed an amended answer on October
27.
As invited by the Court, the parties made preliminary
summary judgment motions to articulate the legal standards that
govern the SEC’s claims and Alpine’s defenses.
The SEC moved
for partial summary judgment on December 6, 2017, submitting
thirty-six SARs under seal as examples of four categories of
purported Rule 17a–8 violations.
Alpine cross-moved for summary
judgment and for judgment on the pleadings on January 19, 2018.
Alpine declined the opportunity to submit additional SARs for
3
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review in connection with the SEC’s motion.
Alpine’s motions
principally argued that the SEC does not have jurisdiction to
bring this action and that the SEC’s complaint was deficient for
failing to plead that Alpine acted with wrongful intent.
An
Opinion of March 30, 2018 (the “March Opinion”) denied Alpine’s
motions and granted in part the SEC’s motion.
See SEC v. Alpine
Sec. Corp., 308 F. Supp. 3d 775 (S.D.N.Y. 2018).1
On June 22, 2018, Alpine and its affiliate, Scottsdale
Capital Advisors (“SCA”),2 filed an action in the United States
District Court for the District of Utah (the “Utah Action”).
See Alpine Sec. Corp. v. SEC, No. 18cv504(CW) (D. Utah filed
June 22, 2018).
The Utah Action sought, inter alia, to enjoin
the SEC from pursuing this action before this Court.
moved to enjoin the Utah Action on July 3.
granted on July 11.
The SEC
That motion was
See SEC v. Alpine Sec. Corp., No.
17cv4179(DLC), 2018 3377152 (S.D.N.Y. July 11, 2018).
Alpine’s
appeal of the July 11 injunction is pending before the Court of
On April 20, 2018, Alpine filed motions to reconsider the
rulings in the March Opinion, and for certification of certain
issues for interlocutory appeal. These motions were denied on
June 18. See SEC v. Alpine Sec. Corp., No. 17cv4179(DLC), 2018
WL 3198889 (S.D.N.Y. June 18, 2018). On June 22, Alpine filed a
petition for writ of mandamus with the United States Court of
Appeals for the Second Circuit. That petition was denied on
August 7. See In re Alpine Sec. Corp., No. 18-1875 (2d Cir.
Aug. 7, 2018).
1
SCA and Alpine are owned by the same individual. For many of
the transactions at issue here, SCA served as Alpine’s
introducing broker.
2
4
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Appeals for the Second Circuit.
See SEC v. Alpine Sec. Corp.,
No. 18-2045 (2d Cir. filed July 12, 2018).
Following the conclusion of discovery, the SEC filed this
summary judgment motion on July 13.
The motion became fully
submitted on September 14.
Background
Much of the relevant factual and regulatory background is
recited in the March Opinion.
Familiarity with the March
Opinion is assumed.
I. The Low-Priced Securities Market
The SAR transactions at issue involve penny stocks and
microcap stocks.3
than $5 per share.
Penny stocks are securities that trade at less
Microcap stocks are defined based on the
market capitalization of the issuer; these stocks tend to have a
share price of less than one cent.
Penny stocks and microcap
stocks are primarily traded in “over-the-counter” markets.
See
March Opinion, 308 F. Supp. 3d at 781 & n.1.
The markets for these low-priced securities (“LPS”) have
The parties do not suggest that the issues in this case turn on
any distinction between the terms share and stock and the terms
are used in this Opinion interchangeably to refer to units of
securities. Similarly, for purposes of this motion, no
distinction is made between deposits of securities with Alpine
in the form of physical certificates or in electronic
transactions. Cf. Delaware v. New York, 507 U.S. 490, 496
(1993) (explaining immobilization of physical certificates of
securities).
3
5
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long been the subject of congressional and regulatory scrutiny
due to the unique characteristics of those markets.
In 1990,
Congress enacted the Penny Stock Reform Act of 1990.
L. No. 101-429, sec. 501, 104 Stat. 931, 951.
See Pub.
That Act includes
congressional findings that “[u]nscrupulous market practices and
market participants have pervaded the ‘penny stock’ market with
an overwhelming amount of fraud and abuse.”
104 Stat. at 951.
Id. sec. 502(4),
Congress concluded that one key problem with
the penny stock market was “a serious lack of adequate
information concerning price and volume of penny stock
transactions, the nature of th[e] market, and the specific
securities in which [individuals] are investing.”
sec. 502(6), 104 Stat. at 951.
Id.
In addition, Congress stated
that “[c]urrent practices do not adequately regulate the role of
‘promoters’ and ‘consultants’ in the penny stock market,” and
that individuals “banned from the securities markets” “ended up
in promoter and consultant roles, contributing substantially to
fraudulent and abusive schemes.”
951.
Id. sec. 502(7), 104 Stat. at
Congress also found that “shell corporations . . . are
used to facilitate market manipulation schemes” in the penny
stock markets.
Id. sec. 502(8), 104 Stat. at 951.
The SEC has promulgated rules pursuant to the Penny Stock
Reform Act.
It revised those rules in 2005 in order to better
combat “fraudulent sales practices” and “the diversion of
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substantial capital to unscrupulous promoters and brokerdealers” in the LPS markets.
See SEC, Amendments to the Penny
Stock Rules, SEC Release No. 49037, 2004 WL 51685, at *3 (Jan.
8, 2004).
Financial regulators frequently warn investors about the
risks of fraud connected to investments in LPS.
The SEC, for
instance, has observed that “information about microcap
companies can be extremely difficult to find, making them more
vulnerable to investment fraud schemes and making it less likely
that quoted prices in the market will be based on full and
complete information about the company.”
SEC, Microcap Stock.4
Similarly, FINRA5 has warned investors “about the dangers of
penny stocks,” focusing on the lack of publicly available or
verifiable information about issuers and the possibility that
the issuer may be a shell company.6
See FINRA, Beware Dormant
SEC, Microcap Stock: A Guide for Investors (Sept. 18, 2013),
https://www.sec.gov/reportspubs/investor-publications/
investorpubsmicrocapstockhtm.html.
4
FINRA, or the Financial Industry Regulatory Authority, is a
self-regulatory organization (“SRO”) that supervises brokerdealers. See Fiero v. Financial Industry Regulatory Auth.,
Inc., 660 F.3d 569, 571 & n.1 (2d Cir. 2011). Its
responsibilities include monitoring broker-dealers’ anti-money
laundering (“AML”) programs. See March Opinion, 308 F. Supp. 3d
at 794-95.
5
A shell company is a company with no or nominal operations, and
either no or only nominal assets, assets “consisting solely of
cash and cash equivalents,” or “[a]ssets consisting of any
amount of cash and cash equivalents and nominal other assets.”
6
7
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Shell Companies.7
The SEC has explained in an administrative decision that
“[p]enny stocks present risks of trading abuses due to the lack
of publicly available information about the penny stock market
in general and the price and trading volume of particular penny
stocks.”
In re Bloomfield, SEC Release No. 9553, 2014 WL
768828, at *2 (SEC Feb. 27, 2014), aff’d, 649 F. App’x 546 (9th
Cir. 2016).
In that decision, the SEC noted that penny stocks
are vulnerable to pump-and-dump schemes that manipulate a stock
price in order to enrich stock promoters.
Id. at *3.
The SEC
added that
[m]oney laundering activities can also be facilitated
through the trading of penny stocks. Some money
laundering red flags include: a customer who has a
questionable background or is the subject of news
reports indicating possible criminal, civil, or
regulatory violations; multiple accounts in the names
of family members or corporate entities for no
apparent business or other purpose; wire transfers to
or from countries identified as money laundering risks
or tax havens; and excessive journal entries between
unrelated accounts.
Id.
As noted, a frequent tool of market manipulation is the use
of shell companies.
See FINRA, Dormant Shell Companies;8 SAR
17 C.F.R. § 240.12b-2; 17 C.F.R. § 230.405.
FINRA, Beware Dormant Shell Companies (Mar. 14, 2016), http://
www.finra.org/investors/beware-dormant-shell-companies.
7
8
FINRA, Dormant Shell Companies -- How to Protect Your Portfolio
8
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Activity Review, Issue 1, at 11.9
FinCEN10 has warned that shell
companies “are an attractive vehicle for those seeking to
launder money or conduct illicit activity” with significant
potential for “abuse” in the form of money laundering or pumpand-dump schemes.
4.11
FinCEN Domestic Shell Company Report at 2,
FinCEN has explained that shell companies are “common tools
for money laundering and other financial crimes, primarily
because they are easy and inexpensive to form and operate.”
FinCEN Shell Company Guidance at 2.12
Alpine does not dispute these risks of investing in the LPS
markets.
Alpine points out, however, that these markets provide
access to capital for smaller companies.
from Fraud (Oct. 30, 2014), http://www.finra.org/investors
/alerts/dormant-shell-companies-portfolio-fraud.
FinCEN, The SAR Activity Review: Trends, Tips & Issues, Issue
1 (Oct. 2000), https://www.fincen.gov/sites/default/files/shared
/sar_tti_01.pdf.
9
FinCEN, the Financial Crimes Enforcement Network, is a
division of the United States Department of the Treasury (the
“Treasury Department”). It is responsible for, as relevant
here, administering the BSA. See March Opinion, 308 F. Supp. 3d
at 791.
10
FinCEN, The Role of Domestic Shell Companies in Financial
Crime and Money Laundering: Limited Liability Companies (Nov.
2006), https://www.fincen.gov/sites/default/files/shared
/LLCAssessment_FINAL.pdf.
11
FinCEN, FIN–2006–G014, Potential Money Laundering Risks
Related to Shell Companies (Nov. 9, 2006), https://www.fincen
.gov/sites/default/files/guidance/AdvisoryOnShells_FINAL.pdf.
12
9
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II. Alpine’s Business
Alpine is a clearing broker.
Clearing brokers provide
clearance and settlement services for introducing brokers.
This
involves handling the recording of transactions, the exchange of
funds, and the delivery of securities after a transaction has
been executed.
Clearing firms typically maintain records of all
trading and issue trade confirmations and statements.
Alpine was founded in 1984.
In early 2011, Alpine was
acquired by its current owner.
III. 2011-2012 FINRA Examination
Alpine is regulated by FINRA and other regulators.
Between
March 2, 2011 and January 22, 2012, FINRA conducted a financial,
operational, and sales practices examination of Alpine.
FINRA
conducted an exit meeting with Alpine on July 23, 2012, where it
shared its highly critical findings with Alpine.
FINRA issued a
seven-page report of that examination on September 28, 2012
(“FINRA Report”).
The FINRA Report listed ten exceptions to Alpine’s
practices, five of which have particular relevance to the issues
raised in this lawsuit.
The FINRA Report discloses that Alpine
did not file any SARs for over six months in 2011 -- March 1
through May 10 and August 16 through December 19 -- and found
that Alpine was not in compliance with a FINRA SAR reporting
rule and two federal reporting regulations, including Section
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1023.320.13
The FINRA Report recited the explanations Alpine
provided for its failure to file these SARs, including that its
compliance officer had determined that these filings were
discretionary and that it was unnecessary to file them.
Alpine’s chief of operations explained that once he had learned
that no SARs had been filed for the period August 16 through
December 19, 2011, Alpine filed SARs to reflect certain
transactions that had occurred during that period.
The FINRA
Report found that these filings were all late and should have
been filed no later than thirty days after the initial detection
of the suspicious activity reported in them.
It concluded that
Alpine had “failed to establish and enforce procedures
reasonably designed to detect and report suspicious activity.”
The FINRA Report also determined that the narrative
sections of the 823 SARs that Alpine did file during the period
March 7, 2011 through January 22, 2012 were “substantively
inadequate” and in violation of Section 1023.320(a)(1).
It
explained that
[t]he narratives for all SARs reviewed were
substantively inadequate as they failed to fully
describe why the activity was suspicious. For the
SARs reviewed, the narrative just described isolated
events of activity without any detail or support of
why the firm actually considered the activity to be
The three regulations are FINRA Rule 3310, Section 1023.320,
and 31 C.F.R. § 1010.520, which requires broker-dealers to
provide certain information about terrorist activity and money
laundering to law enforcement agencies upon request.
13
11
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suspicious and therefore failing to justify at the
basic core the legitimacy of the SAR filing.
The FINRA Report recited the “two basic formats or templates”
that Alpine had used in these SARs, “neither of which were
substantively adequate as they failed to fully describe why the
activity was suspicious.”
As quoted in the FINRA Report, the
first boilerplate, barebones narrative read:
On or around December 09, 2011 ABC LLC deposited a
large quantity (40,000,000 shares) of XYZ Corp, a lowpriced ($0.0001/share) security.
The second read:
ABC Inc. is a client of ACAP Financial, a firm for
which Alpine Securities provides securities clearing
services. Due to the activity within this account, it
has been placed on a Heightened Supervisory list. It
is policy of Alpine to file a SARs [sic] related to
each deposit of securities into accounts of this
nature. On or around 12/23/2011, ABC Inc. deposited a
large quantity (5,097,312) of XYZ Corp, a low-priced
($.0045 /share) security. This transaction amounted
to approximately $22,938.00.
The FINRA Report notes that the first template was used in 559
SARs and the second template was used in 264 SARs.
The FINRA Report also criticized Alpine for failing to
review requests from FinCEN for information, and for the
inadequacies in its AML program, including the program’s failure
to detect and report suspicious activity.
As disclosed in the
Report, Alpine had failed to enforce its own AML procedures,
including the requirement that it file a SAR within thirty days
of becoming aware of a suspicious transaction.
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In response to the FINRA examination, Alpine filed 251 SARs
between December 2011 and May 2012 for transactions that had
occurred between August 17, 2011 and February 3, 2012, and for
which it had previously filed no SARs.
Alpine explains in
opposition to this motion for summary judgment that it filed
these SARs only because FINRA informed Alpine that it expected
to see SARs filed on all transactions involving large deposits
of LPS.
The SEC contends that Alpine violated Rule 17a-8 by
failing to file these SARs within the thirty-day period imposed
by Section 1023.320(b)(3).
These SARs will be referred to as
the Late-Filed SARs.
IV. Alpine’s Improvements of its AML Program and SAR Filing
Program
In response to this motion for summary judgment, Alpine
freely acknowledges that before the change in ownership in 2011,
Alpine had had only limited compliance staff.
Alpine’s current
owners hired more compliance personnel in 2011 and 2012.
Beginning in the Fall of 2012, Alpine arranged for an annual
audit of its AML program.
Also in 2012, Alpine created standard
operating procedures for compliance with AML regulations.
Alpine has submitted three versions of its AML procedures, dated
April 11, 2013, August 29, 2014, and October 1, 2015.
The SEC’s motion for summary judgment is premised in part
on 1,593 SARs that Alpine filed and which the SEC contends
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contain deficiencies in their narratives.
Of those 1,593 SARs,
approximately two-thirds were filed before September 28, 2012,
when Alpine received the FINRA Report.
The following is the narrative section of SAR 1763, which
is one of the post-FINRA Report SARs at issue here.
It was
filed in September 2013, approximately one year after the FINRA
Report.
It reads:
[Customer] is a client of [SCA], a firm for which
Alpine Securities provides clearing services. This
account is a foreign broker-dealer. This account
historically makes deposits of large volumes of lowpriced securities. For that reason this transaction
may be suspicious in nature. On or around [date,
Customer] deposited physical stock certificate(s)
representing a large quantity (2,---,--- shares) of
[issuer], a low-priced ($.05/share) security into
brokerage account [number.] The brokerage account is
maintained through Alpine Securities. This
transaction amounted to approximately $1--,---.--.
The return on the initial investment of $2-,---.-- on
[date six months before transaction] considering the
relatively short time period. [sic]
The SEC contends that this SAR narrative is deficient for
failing to disclose (a) basic customer information, (b) that the
deposit was significantly disproportionate to the average daily
trading volume of the LPS, and (c) that the sub-account holder
is foreign.
V. 2014 OCIE Examination
The SEC Office of Compliance Inspections and Examinations
(“OCIE”) conducted a one-week on-site review of Alpine in July
2014.
OCIE reviewed 252 of the over 4,600 SARs filed by Alpine
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between January 2013 and July 2014, and concluded in a report
issued on April 9, 2015 (“OCIE Report”) that 50% of those 252
SARs “failed to completely and accurately disclose key
information of which [Alpine] was aware at the time of filing.”
OCIE found that the narrative sections of Alpine’s SARs
“generally contained ‘boilerplate’ language.”
It criticized
Alpine for omitting mention of many red flags for suspicious
activity, such as a customer’s civil, regulatory, or criminal
history; foreign involvement with the transactions; concerns
about an issuer; stock promotion activity; and that an issuer
had been a shell company.
In bringing this lawsuit, the SEC
relies on the existence of these red flags in Alpine’s support
files for the SARs Alpine filed.
The OCIE Report found as follows:
All of the information noted above was of critical
importance to adequately and accurately describe the
nature and extent of the suspicious activity that was
the subject of each SAR. And, as evidenced by
Alpine’s own investigative files, Alpine knew of the
omitted information at the time each SAR was filed.
By excluding the information described above, Alpine
failed to “provide a clear, complete, and concise
description of the activity, including what was
unusual or irregular that caused suspicion:” and
failed to show the degree of care required by FinCEN
to complete the narrative. (In fact, we note that the
amount and type of actual material information in SARs
filed by Alpine is very similar to the sample SAR that
FinCEN has identified in its public guidance as being
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insufficient or incomplete.)[14] This rendered the SARs
less valuable to investigators trying to understand
the activity and any criminal or administrative
implications thereof. As a result, the Firm is in
contravention of FinCEN’s SAR Rule and Exchange Act
Rule l7a-8.
(Footnotes omitted.)
The OCIE Report also noted that Alpine filed SARs on
certain customers’ deposits of LPS but “[i]nexplicably” failed
to file SARs when those customers sold those LPS.
The OCIE
Report describes Alpine’s failures as “recidivist activity”
because of FINRA’s 2012 findings that Alpine was filing
substantively inadequate SARs.
It concluded that Alpine’s SAR
practices “obscured the true nature of the suspicious activity,”
and that it appeared that Alpine was “intentionally trying to
obfuscate or distort the truly suspicious nature of the activity
that the Firm is required to report to law enforcement.”
Discussion
The SEC seeks summary judgment as to Alpine’s liability for
The OCIE Report referred to FinCEN published guidance which
gave the following example of an “insufficient or incomplete”
SAR narrative:
Account was opened in 2002. Assets were transferred
in by wire. 50 checks for $250 were deposited,
securities were liquidated and money was paid out in
May 2003.
FinCEN, Guidance on Preparing a Complete & Sufficient Suspicious
Activity Report Narrative 27 (Nov. 2003), https://www.fincen.gov
/sites/default/files/shared/sarnarrcompletguidfinal_112003.pdf
(“SAR Narrative Guidance”).
14
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several thousand violations of Rule 17a-8.
The SEC’s motion is
largely addressed to four discrete alleged deficiencies in
Alpine’s compliance between 2011 and 2015 with SAR reporting
requirements.
For each alleged deficiency, it has submitted a
table that identifies hundreds of deficient or missing SARs or
missing support files for SARs.15
“Summary judgment is appropriate only where there is no
genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.”
Jaffer v. Hirji, 887
F.3d 111, 114 (2d Cir. 2018) (citation omitted).
“A genuine
issue of material fact exists if the evidence is such that a
reasonable jury could return a verdict for the nonmoving party.”
Nick’s Garage, Inc. v. Progressive Cas. Ins. Co., 875 F.3d 107,
113 (2d Cir. 2017) (citation omitted).
“Where the movant has
the burden” of proof at trial, “its own submissions in support
of the motion must entitle it to judgment as a matter of law.”
Albee Tomato, Inc. v. A.B. Shalom Produce Corp., 155 F.3d 612,
618 (2d Cir. 1998)
When the moving party has asserted facts showing that it is
entitled to judgment, the opposing party must “cit[e] to
particular parts of materials in the record” or “show[] that the
The SARs and tables in this case have been filed under seal.
As explained in the March Opinion, the SAR reporting regime is
premised on the secrecy of the SARs. See generally 308 F. Supp.
3d at 783 n.4.
15
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materials cited [by the movant] do not establish the absence
. . . of a genuine dispute” in order to show that a material
fact is genuinely disputed.
Fed. R. Civ. P. 56(c)(1).
“A party
may not rely on mere speculation or conjecture as to the true
nature of the facts to overcome a motion for summary judgment,”
as “[m]ere conclusory allegations or denials cannot by
themselves create a genuine issue of material fact where none
would otherwise exist.”
Hicks v. Baines, 593 F.3d 159, 166 (2d
Cir. 2010) (citation omitted).
Only disputes over “facts that
might affect the outcome of the suit under the governing law”
will properly preclude the entry of summary judgment.
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
Anderson
Summary
judgment may be granted if the evidence cited by the nonmovant
is “merely colorable or is not significantly probative.”
Id. at
249 (citation omitted).
I. Regulatory Framework
This case concerns the interplay of regulations promulgated
under two federal statutes:
the BSA, 31 U.S.C. § 5311, et seq.,
first enacted in 1982, and the Securities Exchange Act of 1934
(the “Exchange Act”), 15 U.S.C. § 78a, et seq.
The BSA allows
the Secretary of the Treasury to “require any financial
institution . . . to report any suspicious transaction relevant
to a possible violation of law or regulation.”
§ 5318(g)(1).
31 U.S.C.
The Secretary has delegated this authority to
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FinCEN.16
Pursuant to these delegations, in 2002 the Treasury
Department and FinCEN promulgated Section 1023.320.17
There are
similar suspicious activity reporting regulations that apply to
other types of financial institutions, such as banks, casinos,
and mutual funds.
See, e.g., 31 C.F.R. §§ 1020.320 (banks),
1021.320 (casinos), 1024.320 (mutual funds).
Rule 17a-8 was promulgated by the SEC in 1981 under
authority delegated to it by Congress in the Exchange Act.
March Opinion, 308 F. Supp. 3d at 796.
See
The Rule requires a
broker-dealer to “comply with the reporting, recordkeeping and
record retention requirements of chapter X of title 31 of the
Code of Federal Regulations.”
17 C.F.R. § 240.17a-8.
The reporting and record-keeping requirements found in
Chapter X of Title 31 of the Code of Federal Regulations and
incorporated by Rule 17a-8 include Section 1023.320, which,
among other things, requires a broker-dealer to file SARs.
Section 1023.320 states in pertinent part:
(1) Every broker or dealer in securities within the
United States (for purposes of this section, a
“broker-dealer”) shall file with FinCEN, to the extent
See Treasury Order 180-01, 67 Fed. Reg. 64,697, 64,697 (Oct.
21, 2002).
16
See FinCEN, Amendment to the Bank Secrecy Act Regulations -Requirement that Brokers or Dealers in Securities Report
Suspicious Transactions, 67 Fed. Reg. 44,048 (July 1, 2002)
(“FinCEN Section 1023.320 Notice”). The USA PATRIOT ACT of
2001, Pub. L. No. 107-56, 115 Stat. 272 (the “Patriot Act”),
significantly expanded the scope of the BSA.
17
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and in the manner required by this section, a report
of any suspicious transaction relevant to a possible
violation of law or regulation. A broker-dealer may
also file with FinCEN a report of any suspicious
transaction that it believes is relevant to the
possible violation of any law or regulation but whose
reporting is not required by this section. . . .
(2) A transaction requires reporting under the terms
of this section if it is conducted or attempted by,
at, or through a broker-dealer, it involves or
aggregates funds or other assets of at least $5,000,
and the broker-dealer knows, suspects, or has reason
to suspect that the transaction (or a pattern of
transactions of which the transaction is a part):
(i) Involves funds derived from illegal activity or is
intended or conducted in order to hide or disguise
funds or assets derived from illegal activity
(including, without limitation, the ownership, nature,
source, location, or control of such funds or assets)
as part of a plan to violate or evade any Federal law
or regulation or to avoid any transaction reporting
requirement under Federal law or regulation;
(ii) Is designed, whether through structuring or other
means, to evade any requirements of this chapter or of
any other regulations promulgated under the Bank
Secrecy Act;
(iii) Has no business or apparent lawful purpose or is
not the sort in which the particular customer would
normally be expected to engage, and the broker-dealer
knows of no reasonable explanation for the transaction
after examining the available facts, including the
background and possible purpose of the transaction; or
(iv) Involves use of the broker-dealer to facilitate
criminal activity.
31 C.F.R. § 1023.320(a) (emphasis supplied).
The regulation also provides that a SAR must be filed
no later than 30 calendar days after the date of the
initial detection by the reporting broker-dealer of
facts that may constitute a basis for filing a SAR
20
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under this section. If no suspect is identified on
the date of such initial detection, a broker-dealer
may delay filing a SAR for an additional 30 calendar
days to identify a suspect, but in no case shall
reporting be delayed more than 60 calendar days after
the date of such initial detection.
31 C.F.R. § 1023.320(b)(3) (emphasis supplied).
In addition, a broker-dealer is required to retain support
files for SARs for five years, as follows:
Retention of records. A broker-dealer shall maintain
a copy of any SAR filed and the original or business
record equivalent of any supporting documentation for
a period of five years from the date of filing the
SAR. Supporting documentation shall be identified as
such and maintained by the broker-dealer, and shall be
deemed to have been filed with the SAR. A brokerdealer shall make all supporting documentation
available to FinCEN or any Federal, State, or local
law enforcement agency, or any Federal regulatory
authority that examines the broker-dealer for
compliance with the Bank Secrecy Act, upon request
. . . .
31 C.F.R. § 1023.320(d) (emphasis supplied).
SARs are currently submitted to FinCEN via an electronic
SAR Form.18
Part I of the Form is titled “Subject Information”
Over the period at issue in this action, two versions of the
SAR Form were in effect: one from 2002 to 2012 (the “2002 SAR
Form”) and one after 2012 (the “2012 SAR Form”). See March
Opinion, 308 F. Supp. 3d at 792-93. The 2002 SAR Form includes
instructions for what information to include in the narrative
section on the form. See 2002 SAR Form at 3. A copy of the
2002 SAR Form is attached as an Exhibit to this Opinion. FinCEN
published notices with drafts of the 2002 and 2012 SAR Forms in
the Federal Register and solicited public comment before
requiring regulated parties to use those forms. See March
Opinion, 308 F. Supp. 3d at 792 & nn.10-11. In connection with
the 2012 SAR Form, FinCEN published an instructional document.
See FinCEN, FinCEN Suspicious Activity Report (FinCEN SAR)
18
21
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and requires a filer to provide identifying information about
the subject of the SAR.
2002 SAR Form at 1.
The subject of a
SAR is defined in guidance as the individuals or entities
“involved in the suspicious activity.”
at 3.
SAR Narrative Guidance
“If more than one individual or business is involved in
the suspicious activity,” a filer must “identify all suspects
and any known relationships amongst them in the Narrative
Section.”
Id.; see also 2012 SAR Instructions at 88 (directing
filers to provide subject information for “each known subject
involved in the suspicious activity”).
Part II of the SAR Form requires the filer to identify the
suspicious activity being reported.
A filer must provide the
date or date range of suspicious activity and the dollar amount
involved.
In addition, there is a list of financial
instruments, such as “Bonds/Notes,” “Stocks,” and “Other
securities.”
2002 SAR Form at 1.19
all that apply to the transaction.
A filer is directed to check
A filer must also check
Electronic Filing Instructions (2012), https://www.fincen.gov
/sites/default/files/shared/FinCEN%20SAR%20ElectronicFiling
Instructions-%20Stand%20Alone%20doc.pdf (“2012 SAR
Instructions”). The 2012 SAR Instructions and the 2002 SAR Form
contain essentially identical instructions for completing the
SAR narrative. The parties do not contend that there are any
differences in those instructions that are material to the
issues in dispute here.
The 2012 SAR Form replaced the list of financial “instruments”
with a list of “product type(s) involved in the suspicious
activity.” That list includes a box to check for “Penny
stocks/Microcap securities.” 2012 SAR Form at 7.
19
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boxes identifying the type of suspicious activity, which
includes “Commodity futures/options fraud,” “Insider trading,”
“Market manipulation,” “Money laundering/structuring,”
“Prearranged or other non-competitive trading,” “Securities
fraud,” “Wash or other fictitious trading,” and “Wire fraud.”
Id.
This list also includes an option to check “Other,” with an
instruction to “[d]escribe” the activity in the narrative
portion of the SAR.
Id.
A FinCEN instructional document for
this Form directs filers to “[p]rovide a brief explanation in
[the SAR narrative] of why each box is checked.”
2002 Form
Instructions at 3.20
The SAR Form also contains directions for SAR filers about
how to complete the narrative portion of the SAR.21
The
instructions state that the narrative
section of the report is critical. The care with
which it is completed may determine whether or not the
described activity and its possible criminal nature
are clearly understood by investigators. Provide a
clear, complete and chronological description . . . of
the activity, including what is unusual, irregular or
suspicious about the transaction(s), using the
checklist below as a guide.
FinCEN, Form 101a, Suspicious Activity Report (SAR-SF)
Instructions (May 22, 2004), https://www.fincen.gov/sites
/default/files/shared/fin101_instructions_only.pdf.
20
The following excerpts are taken from the 2002 SAR Form. As
explained in the March Opinion, materially similar directions
are included in an instructional document created by FinCEN for
the post-2012 electronic filing system. See 308 F. Supp. 3d at
793 (citing 2002 SAR Form and 2012 SAR Instructions).
21
23
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(Emphasis in original.)
The checklist has twenty-two items,
each addressed to a specific type of information.
The following
items are particularly relevant to the SEC’s motion for summary
judgment:
h. Indicate whether the suspicious activity is an
isolated incident or relates to another transaction.
i. Indicate whether there is any related litigation.
If so, specify the name of the litigation and the
court where the action is pending.
. . .
k. Indicate whether any information has been excluded
from this report; if so, state reasons.
l. Indicate whether U.S. or foreign currency and/or
U.S. or foreign negotiable instrument(s) were
involved. If foreign, provide the amount, name of
currency, and country of origin.
. . .
o. Indicate any additional account number(s), and any
foreign bank(s) account number(s) which may be
involved.
p. Indicate for a foreign national any available
information on subject’s passport(s), visa(s), and/or
identification card(s). Include date, country, city
of issue, issuing authority, and nationality.
q. Describe any suspicious activities that involve
transfer of funds to or from a foreign country, or
transactions in a foreign currency. Identify the
country, sources and destinations of funds.
2002 SAR Form at 3.
FinCEN has issued a number of guidance documents explaining
the scope of the SAR reporting duty in the narrative section of
24
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the SAR Form.
FinCEN guidance interpreting Section 1023.320 is
entitled to deference.
791.
See March Opinion, 308 F. Supp. 3d at
That guidance includes the instruction that a SAR
narrative should include the who, what, when, why, where, and
how of the suspicious activity (the “Five Essential Elements”).22
See SAR Narrative Guidance at 3–6; SAR Activity Review, Issue
22, at 39–40;23 2012 SAR Instructions at 110–12.
308 F. Supp. 3d at 791-95.
See generally
To interpret the scope of Section
1023.320, this Opinion principally relies on the instructions on
the 2002 SAR Form, the 2012 SAR Instructions, and the SAR
Narrative Guidance issued in 2003.
Both the 2002 SAR Form (and
its list of instructions) and the 2012 SAR Form were promulgated
after FinCEN published a notice in the Federal Register with a
draft version of the form and invited public comment.
See
FinCEN 2002 SAR Form Notice, 67 Fed. Reg. at 50,751;24 FinCEN
FinCEN guidance refers to the who, what, where, when, and why,
as the “five essential elements” of a SAR narrative, but also
adds that a sixth element, “the method of operation (or how?)[,]
is also important.” SAR Narrative Guidance at 3. This Opinion
follows FinCEN’s lead in calling these six elements the Five
Essential Elements of a SAR.
22
FinCEN, The SAR Activity Review: Trends, Tips & Issues, Issue
22 (Oct. 2012), https://www.fincen.gov/sites/default/files
/shared/sar_tti_22.pdf.
23
FinCEN, Proposed Collection, Comment Request, Suspicious
Activity Report by the Securities and Futures Industry, 67 Fed.
Reg. 50,751 (Aug. 5, 2002).
24
25
Case 1:17-cv-04179-DLC Document 174 Filed 12/11/18 Page 26 of 100
2012 SAR Form Notice, 75 Fed. Reg. at 63,545.25
The 2012 SAR
Instructions are similar in all respects that are material to
this litigation to those instructions contained in the 2002 SAR
Form.26
The SAR Narrative Guidance was issued by FinCEN in 2003
with the “purpose” of “educat[ing] SAR filers on how to organize
and write narrative details that maximize[] the value of each
SAR form.”
SAR Narrative Guidance at 1.
This “guidance
document” describes in detail the Five Essential Elements of a
SAR narrative, describes how a SAR narrative should be
structured, and provides examples of sufficient and insufficient
narratives for each type of filing entity.
See id. at 1-2.
The “who” of the Five Essential Elements encompasses the
“occupation, position or title . . . , and the nature of the
suspect’s business(es);” the “what” includes “instruments or
mechanisms involved” such as wire transfers, shell companies,
and “bonds/notes;” and the “why” includes “why the activity or
transaction is unusual for the customer; consider[ing] the types
of products and services offered by the [filer’s] industry, and
the nature and normally expected activities of similar
FinCEN, Proposed Collection, Comment Request, Bank Secrecy Act
Suspicious Activity Report Database Proposed Data Fields, 75
Fed. Reg. 63,545 (Oct. 15, 2010).
25
Alpine does not argue that its SAR obligations changed when
the filing format changed in 2012.
26
26
Case 1:17-cv-04179-DLC Document 174 Filed 12/11/18 Page 27 of 100
customers.”27
SAR Narrative Guidance at 3–4.
The “how” includes
the “method of operation of the subject conducting the
suspicious activity,” by giving “as completely as possible a
full picture of the suspicious activity involved.”
Id. at 6.
The obligation to identify involved parties in a transaction
extends to all “subject(s) of the filing,” and “filers should
include as much information as is known to them about the
subject(s).”
SAR Activity Review, Issue 22, at 39.
Examples of relevant information listed by FinCEN include
“bursts of activities within a short period of time,” SAR
Narrative Guidance at 5, whether foreign individuals, entities,
or jurisdictions are involved, 2012 SAR Instructions at 112, or
the involvement of unregistered businesses, SAR Narrative
Guidance at 5.
A common scenario identified by FinCEN as
suspicious involves a “[s]ubstantial deposit . . . of very lowpriced and thinly traded securities” followed by the
“[s]ystematic sale of those low-priced securities shortly after
being deposited.”
SAR Activity Review, Issue 15, at 24.28
The SAR Narrative Guidance also directs filers to find
“[o]ther examples of suspicious activity . . . in previously
published FinCEN Advisories, SAR Bulletins, and editions of The
SAR Activity Review – Trends, Tips & Issues.” SAR Narrative
Guidance at 6 n.5. Those sources are cited in this Opinion and
in the March Opinion.
27
FinCEN, The SAR Activity Review: Trends, Tips & Issues, Issue
15 (May 2009), https://www.fincen.gov/sites/default/files/shared
/sar_tti_15.pdf.
28
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FinCEN has explained that “[t]ransactions like these are red
flags for the sale of unregistered securities, and possibly even
fraud and market manipulation,” and firms need to “investigate[]
thoroughly” such questions as “the source of the stock
certificates, the registration status of the shares, how long
the customer has held the shares and how he or she happened to
obtain them, and whether the shares were freely tradable.”
Id.
Broker-dealers are also required by regulation to maintain
written AML policies that define how the broker-dealer detects
potential money laundering and implements the duty to file SARs.
This requires broker-dealers to engage in “ongoing customer due
diligence,” which includes
(i) Understanding the nature and purpose of customer
relationships for the purpose of developing a customer
risk profile; and
(ii) Conducting ongoing monitoring to identify and
report suspicious transactions and, on a risk basis,
to maintain and update customer information . . .
includ[ing] information regarding the beneficial
owners of legal entity customers.
31 C.F.R. § 1023.210(b)(5).
In 2002, FinCEN delegated its BSA authority over brokerdealer AML programs to the SEC and SROs including FINRA.29
See FinCEN, Anti–Money Laundering Programs for Financial
Institutions, 67 Fed. Reg. 21,110, 21,111 (Apr. 29, 2002)
(interim final rule effective April 24, 2002); see also 31
C.F.R. § 1023.210(c) (requiring a broker-dealer AML program to
“[c]ompl[y] with the rules, regulations, or requirements of its
self-regulatory organization governing such programs”).
29
28
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Pursuant to its supervisory authority over SROs, the SEC
reviewed and approved AML best practices submitted by the SROs.30
FINRA Rule 3310 has governed its members’ AML programs since
2009.31
Rule 3310 requires member firms to have a written AML
policy that receives approval from FINRA’s senior management and
that “[e]stablish[es] and implement[s] policies, procedures, and
internal controls reasonably designed to achieve compliance with
the Bank Secrecy Act and the implementing regulations
thereunder.”
FINRA Rule 3310(b) (2015).32
The Rule also
requires that member firms “[e]stablish and implement policies
and procedures that can be reasonably expected to detect and
cause the reporting of transactions required under 31 U.S.C.
5318(g) and the implementing regulations thereunder.”
FINRA
Rule 3310(a).
II. General Arguments
The SEC makes four categories of claims, each of which is
separately addressed below.
It asserts that Alpine filed SARs
See SEC, Order Approving Proposed Rule Changes Relating to
Anti–Money Laundering Compliance Programs, 67 Fed. Reg. 20,854
(Apr. 26, 2002).
30
See SEC, Order Approving Proposed Rule Change to Adopt FINRA
Rule 3310 (Anti–Money Laundering Compliance Program) in the
Consolidated FINRA Rulebook, SEC Release No. 60645, 2009 WL
2915633 (Sept. 10, 2009). Prior to 2009, substantially similar
rules governed broker-dealer AML programs administered by
FINRA’s predecessor organizations. See id. at *1.
31
Found at http://finra.complinet.com/en/display/display_main.
html?rbid=2403&element_id=8656.
32
29
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that failed to report in their narrative sections one or more of
seven different types of information.
It then asserts that
Alpine failed to file SARs reporting suspicious sales following
large deposits of LPS.
The third set of claims concerns SARs
that the SEC asserts were filed later than allowed by Section
1023.320.
Finally, the SEC asserts that Alpine violated the law
by not maintaining support files for many of the SARs it filed.
Before addressing the specific violations on which the SEC seeks
summary judgment, this Opinion addresses Alpine’s general
arguments about the propriety of this action.
Alpine contests whether the SEC has authority to bring this
suit.33
In large part, these arguments were addressed in the
March Opinion.
See 308 F. Supp. 3d at 795-97.
Alpine argues
that the SEC has not been empowered to sue for violations of the
BSA.
See id. at 795-96.
According to Alpine, the Treasury
Department, and in particular FinCEN, are empowered to enforce
the BSA, and FinCEN has delegated to the SEC only the authority
to examine a broker-dealer for compliance with the BSA but not
the authority to enforce the BSA.
Alpine is correct that FinCEN has not expressly delegated
Alpine principally presents its legal argument in the expert
declaration Alpine submitted with its opposition papers. These
legal arguments may not be presented through an expert. See
DiBella v. Hopkins, 403 F.3d 102, 121 (2d Cir. 2005) (“Expert
witness statements embodying legal conclusions exceed the
permissible scope of opinion testimony under the Federal Rules
of Evidence.” (citation omitted.)).
33
30
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BSA enforcement authority to the SEC.
But, that ignores the
separate statutory authority at issue here.
The SEC has its own
independent authority to require broker-dealers to make reports,
and has enforcement authority over those broker-dealer reporting
obligations.
It was efficient for the Treasury Department to
delegate its own duty to examine broker-dealers to the agency
primarily responsible for regulating broker-dealers.
The Exchange Act requires broker-dealers to “make . . .
such reports as the Commission . . . prescribes as necessary or
appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of [the
Exchange Act].”
15 U.S.C. § 78q(a)(1).
One of the rules the
SEC has promulgated pursuant to this statute is Rule 17a-8.
As
explained in the March Opinion, Rule 17a-8 is a valid exercise
of the broad authority Congress conferred on the SEC in 15
U.S.C. § 78q(a)(1).34
Rule 17a-8 incorporates the reporting
Alpine and its expert fail to engage with the analysis
provided in the March Opinion. In particular, they do not
account for the SEC’s interpretation of Rule 17a-8 as
encompassing the duty to file a SAR and otherwise comply with
Section 1023.320 in a formal adjudication. See In re
Bloomfield, SEC Release No. 9553, 2014 WL 768828, at *15–*17
(Feb. 24, 2014). As explained in the March Opinion, it is
axiomatic that agencies may announce rules by rulemaking or
through a formal adjudication, and when an agency acts through
adjudication, its rules are necessarily retrospective. See 308
F. Supp. 3d at 788 (citing SEC v. Chenery Corp., 332 U.S. 194,
201–02 (1947) and Bowen v. Georgetown Univ. Hosp., 488 U.S. 204,
221 (1988) (Scalia, J., concurring)). The March Opinion thus
34
31
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obligations imposed on broker-dealers in that section of the
Code of Federal Regulations in which the SAR regime is
contained.
See March Opinion, 308 F. Supp. 3d at 797.
Alpine also makes a related argument that the FinCEN
guidance on which the SEC relies was not meant to create rules
of law, but rather provided a number of suggestions that brokerdealers could consider when filing SARs.
Alpine also contends
that it lacked notice about its SAR obligations because some
guidance documents were issued after certain transactions
occurred.
Neither argument is persuasive.
First, while FinCEN guidance is informative and useful, its
role in this action can be overstated.
The violations that the
SEC asserts occurred here arose from Alpine’s failure to comply
with Section 1023.320’s mandates and the SAR Form’s
instructions, including the requirement that it provide in its
SARs’ narratives a “clear, complete and chronological
description [of] what is unusual, irregular or suspicious about
the transaction(s).”
2002 SAR Form at 3.
These instructions
have the force of law, having been issued as FinCEN regulations
following a notice and comment period.35
Second, it has long been established that an agency’s
provided two bases for concluding that the SEC may bring this
action under Rule 17a-8.
35
See FinCEN 2002 SAR Form Notice, 67 Fed. Reg. 50,751.
32
Case 1:17-cv-04179-DLC Document 174 Filed 12/11/18 Page 33 of 100
guidance documents receive deference when they reasonably
interpret an agency’s ambiguous regulation.
See Nat. Res. Def.
Council v. EPA, 808 F.3d 556, 569 (2d Cir. 2015); see also March
Opinion, 308 F. Supp. 3d at 791 (concluding that Section
1023.320 is ambiguous and that FinCEN guidance is entitled to
deference).
Alpine does not argue that Section 1023.320,
including its injunction that a broker-dealer report suspicious
transactions, is unambiguous.
Indeed, that regulation is
designed to capture the breadth of ways in which a broker-dealer
could be “use[d]” to “facilitate criminal activity.”
§ 1023.320(a)(2)(iv).
31 C.F.R.
Nor does Alpine argue that FinCEN
guidance unreasonably interprets either Section 1023.320 or the
SAR Form.
The FinCEN guidance cited by the SEC explains that
certain fact patterns are typical of suspicious activity and
should be reported by SAR filers.
See SAR Narrative Guidance at
4-6 (listing “[e]xamples of some common patterns of suspicious
activity” that should be included in a SAR narrative).
These
guidance documents, responding to the broad legal requirement
contained in Section 1023.320, give content to a broker-dealer’s
obligation to file SARs.
Alpine also contends it is inappropriate to rely on some
guidance documents cited by the SEC because those documents were
promulgated after the SARs at issue were filed.
The principal
source of guidance cited here is the 2003 SAR Narrative
33
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Guidance.
That document predates all of the SARs at issue.
In
addition, this Opinion cites several issues of the SAR Activity
Review from 2000, 2009, and 2012.
The 2012 issue is only cited,
however, in conjunction with earlier guidance documents.
Alpine makes two additional arguments about its
interactions with FINRA and the SEC.
Alpine first argues that
it did not have notice of the SEC’s theory of this case until it
received the OCIE Report in 2015 and that it is accordingly
unfair to hold it liable for failing to include mention of red
flags in its SARs’ narratives that the SEC asserts it improperly
omitted.
This argument fails.
The SEC has the burden to show
that Alpine’s failures violated Section 1023.320.
The standards
at issue here are those that have existed since the issuance of
the 2002 SAR Form, which provided the mechanism by which brokerdealers comply with the requirements of Section 1023.320.
Nothing OCIE did or said in 2015 can increase the scope of that
duty.36
In addition, Section 1023.320 uses an objective standard
to measure compliance.
799.
See March Opinion, 308 F. Supp. 3d at
This standard obligated Alpine to file SARs when it had
reason to suspect criminal activity.
Its ignorance of its legal
obligations or its intent in failing to comply with those
Similarly, this Opinion cites the FINRA and OCIE Reports
solely to give context to arguments Alpine has made in
opposition to this motion. These Reports are not the source of
any legal obligation or of any finding that Alpine violated
Section 1023.320.
36
34
Case 1:17-cv-04179-DLC Document 174 Filed 12/11/18 Page 35 of 100
obligations may be relevant to an award of damages, but they are
not defenses to this motion regarding its liability.
Alpine next contends that its level of compliance with
Section 1023.320 increased over time, and that it has shown that
it tried in good faith to comply with its SAR obligations.
It
is true that approximately two-thirds of the SARs at issue in
the SEC’s motion predate the FINRA Report.
But even if Alpine
is correct that its program improved over time, this does not
immunize Alpine for its past failures to include required
information in any SAR narrative, or to file a SAR when it was
required to do so.
A broker-dealer’s duty to maintain an AML
program reasonably calculated to ensure compliance with the BSA
is distinct from the duty to file a complete report of
suspicious transactions.
Finally, Alpine asserts that holding it liable under the
SEC’s theory in this case would be extraordinary and wreak havoc
with the SAR regime and the broker-dealer industry.
Not so.
This Opinion holds the SEC to the well-established summary
judgment standard.
The SEC is required to demonstrate that no
question of fact exists regarding whether Alpine complied with
Section 1023.320 for each SAR, missing SAR, or missing SAR
support file on which it seeks summary judgment.
To defeat the
SEC’s motion, all Alpine must do is raise a question of fact.
Alpine has done so in a number of instances -- both as to
35
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individual SARs and as to entire categories of SARs.
This
Opinion denies summary judgment to the SEC wherever its
presentation is deficient, and wherever Alpine identifies a
question of fact as to the specific SAR or transaction at issue.
As described below, the SEC has shown that the failures in
Alpine’s SAR-reporting regime were stark.
Tellingly, Alpine
does not contest in a large number of instances that it failed
to include information in SAR narratives that the SAR Form
itself directs a broker-dealer to include.
Given the sheer
number of lapses at issue in this case, there is no basis to
conclude that a broker-dealer that reasonably attempts to follow
the requirements of Section 1023.320 will be at risk.
And
questions about what effect this action will have on the SAR
regime are ultimately about policy, not the law a court must
apply.
This Opinion resolves the SEC’s motion by applying well-
established principles of administrative law and summary
judgment.
Following those principles, the SEC’s motion is
granted in part.
III. Admissibility of Summary Tables
Before addressing the various deficiencies in Alpine’s
compliance with the SAR reporting regimen that are asserted by
the SEC, a threshold evidentiary issue must be resolved.
Relying on Rule 1006, Fed. R. Evid., the SEC has supported its
motion for summary judgment with ten tables that identify the
36
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SARs or transactions as to which it is asserting each alleged
deficiency.
Rule 1006 provides that
[t]he proponent may use a summary, chart, or
calculation to prove the content of voluminous
writings, recordings, or photographs that cannot be
conveniently examined in court. The proponent must
make the originals or duplicates available for
examination or copying, or both, by other parties at a
reasonable time and place. And the court may order
the proponent to produce them in court.
Fed. R. Evid. 1006.
Such a summary must be “based on foundation
testimony connecting it with the underlying evidence summarized
and must be based upon and fairly represent competent [and
admissible] evidence.”
Fagiola v. Nat’l Gypsum Co. AC&S, 906
F.2d 53, 57 (2d Cir. 1990) (citation omitted).
Objections that
a summary “d[oes] not fairly represent the [underlying]
documents and [is] excessively confusing and misleading go more
to [the summary’s] weight than to its admissibility.”
U.S. ex
rel. Evergreen Pipeline Constr. Co. v. Merritt Meridian Constr.
Corp., 95 F.3d 153, 163 (2d Cir. 1996) (citation omitted).
The SEC’s ten tables include seven that correspond to the
seven alleged deficiencies in the SAR narratives.37
These seven
The ten tables are labelled in the SEC papers as Exhibits 3
through 12. Exhibits 3 through 9 are also labelled Tables A-1
through A-7 to Exhibit 2 in the SEC’s submissions. Tables A-1
through A-7 are referred to in this Opinion as Tables 1 through
7. SEC Exhibits 10 through 12 are referred to as Tables 10
through 12. Using this numbering system, this Opinion does not
refer to any Table 8 or 9.
37
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deficiencies are the omission of (1) basic customer information,
(2) “related” litigation, (3) shell company status or derogatory
history of the stock, (4) stock promotion activity, (5)
unverified issuers, (6) low trading volume, and (7) foreign
involvement.
Each of these seven tables has six columns.
The columns
list the SAR item number,38 date filed, SAR Bates stamp, volume
of shares in the transaction, value stated in the SAR narrative,
and a final column with a heading describing the type of
violation and a Bates stamp page number where the missing
information was found in Alpine’s support file for that SAR.
Table 10 is itself a summary table for Tables 1 though 7.
It lists all 1,594 SARs for which the SEC contends the SAR
narratives were deficient.
Table 10 contains columns
identifying the SAR number,39 the Alpine customer identified in
the SAR, and the SAR Bates stamp number.
Table 10 also has
seven columns corresponding to the seven types of deficient
The item number is a number assigned to each SAR in Tables 1
through 7. The numbering system is nonconsecutive and does not
correspond to any chronological or other apparent order.
38
The SAR number is a number assigned to each allegedly
deficient SAR, consecutively from 1 to 1,594. The number is
different than the item number, and the SEC has not provided a
table that matches an item number to a SAR number. As a result,
the item number and the SAR number may only be matched by
comparing the Bates numbers between Table 10 and Tables 1
through 7. As was true with the item number, the SAR number
does not correspond to chronological or other apparent order.
39
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narratives for which the SEC seeks summary judgment.
have entries in multiple deficiency columns.
Many SARs
Those columns have
a Bates stamp page number that gives the location in the Alpine
SAR support file where information missing from the SAR
narrative is found.
The two remaining tables are Tables 11 and 12.
lists sales-and-liquidation patterns.
Table 11
The SEC contends that
Alpine had a duty to file SARs reflecting these sales, but did
not do so.
Table 11 lists 1,242 groups of transactions,
organized as follows.
The right half of the table lists a
deposit date, the volume of the deposit, the value of the
deposit, the date a SAR was filed reporting the deposit, and the
Bates stamp number for that SAR.
The left portion of the table
lists a group number, the customer name, a liquidation date, the
number of shares sold, and the stock symbol.
The SEC contends
that Alpine should have filed a SAR for at least each of the
1,242 groups.
Table 12 lists the SARs that the SEC alleges were filed
late.
It lists the SAR number, the Bates stamp number, the date
of the transaction reported, the date the SAR was filed, the
number of days between the transaction and SAR, and the number
of days the SAR was late.
The number of days late is calculated
by subtracting 30 from the number of days between date of the
transaction and the date the SAR was filed.
39
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These tables summarize voluminous evidence that is not
subject to convenient examination in court.
organized by subject matter.
This evidence is
Each type of violation alleged in
the case has its own separate table, and one table also allows
the fact-finder to determine whether a single SAR is alleged to
reflect multiple violations.
The SEC seeks summary judgment as
to approximately 1,800 SARs, and moves for summary judgment as
to approximately 3,500 other transactions that are listed in
Alpine’s transaction records.
Accordingly, the threshold for
Rule 1006 -- that a summary be used to prove the content of
voluminous writings -- is met.
Alpine does not suggest that it
has not had access to the underlying documentation -- which came
from its files -- or that the SARs and the SAR support files
referenced in the tables are not admissible documents.
To the extent that the tables list information such as an
item number, date of SAR filing, Bates stamp number, volume of
shares in the underlying transaction, and the value stated in a
SAR, these are classic examples of information that is
appropriately captured in a summary table.
The SEC has merely
taken a number or date from a voluminous quantity of admissible
documents and placed the data in a convenient format for the
fact finder.
On this basis, there can be little debate that
these components of Tables 1 through 7 and 10 through 12 are
admissible.
40
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To the extent that a column in a Table identifies a
particular alleged deficiency in a SAR and lists a Bates stamp
page number from the SAR’s support file upon which the SEC
relies to show that deficiency, those columns also summarize the
contents of voluminous files and are admissible to prove the
contents of those files.
Alpine is free to argue that there are
inaccuracies in the tables -- in fact, it has raised a few such
arguments as to each of the tables.
Subject to specific
challenges by Alpine, therefore, these tables are admissible as
summaries of the contents of voluminous admissible documents -the Alpine SARs and their support files, and Alpine transaction
records.
Alpine argues that a column heading identifying the
particular deficiency at issue for a SAR is an expert opinion.
It is not.
That column heading reflects the SEC’s contention
and includes as well a citation to the documents supporting that
contention.
This citation permitted Alpine, and permits the
fact finder, to assess whether that contention is proven in the
case of an individual SAR.
Indeed, expert testimony would be
inadmissible to prove these violations.
An expert’s opinion may
not “usurp either the role of the trial judge in instructing the
jury as to the applicable law or the role of the jury in
applying that law to the facts before it.”
United States v.
Stewart, 433 F.3d 273, 311 (2d Cir. 2006) (citation omitted).
41
A
Case 1:17-cv-04179-DLC Document 174 Filed 12/11/18 Page 42 of 100
fact finder, advised of the governing law would have to assess
whether Alpine complied with the law in filing each SAR
identified in a table (or violated the law in failing to file a
SAR for each group of transactions for which there was no SAR
filed, again as identified in a table).
For instance, advised
by the court of what constitutes “related” litigation, does the
SAR support file contain a description of such litigation, and
was that information omitted from the SAR narrative?
Alpine also argues that Table 11 is inadmissible because
the groups listed in Table 11 reflect expert conclusions
unsupported by a reliable methodology.
Not so.
The group
numbers are used by the SEC as a contention that each of the
deposits and liquidations listed in a group form a suspicious
pattern that had to be reported in a SAR.
This is a question of
fact to be resolved under the governing law.
The SEC may have
relied on an expert and consulting group to assist it in
assembling the groups of transactions on which the SEC would
focus in this action, but that task could have been done as well
by an SEC attorney or an SEC paralegal.
than the SEC’s contentions.
It reflects no more
The fact finder, applying the
controlling law, will have to examine the facts summarized in
Table 11 and determine for each group whether there is an
actionable pattern of suspicious trading that triggered Alpine’s
duty to file a SAR reporting the sales listed within a group.
42
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An expert cannot tread on that duty, which rests on the
shoulders of a fact finder.
Of course, a qualified expert could
properly provide testimony generally about illicit and
manipulative market activities and practices to inform a fact
finder’s examination of each of the listed groups, and improve
its understanding of suspicious patterns, but the table by
itself does not do that.
Finally, Alpine contends that the SEC has failed to carry
its burden of proof by relying exclusively on the tables without
also offering each of the SARs and support files to which the
tables refer.
That objection is not well founded.
In
connection with the partial summary judgment motion, the SEC
submitted exemplar SARs and support files; Alpine chose not to
do so.
The legal framework for the litigation of the SEC’s
claims having been described in the March Opinion, the SEC
appropriately relied on Rule 1006 to present in convenient and
summary form the voluminous evidence on which it relies.
Alpine
has had a full opportunity to raise questions of fact in
response and to submit SARs and support files where it takes
issue with the SEC’s assertions.
This Opinion examines that
evidence, and where appropriate, denies the SEC’s summary
judgment motion.
IV. Deficient Narratives
The first of the four categories of claims brought by the
43
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SEC concerns 1,593 SARs that Alpine filed.40
The SEC claims that
Alpine was required by law to include information in 1,593 SAR
narratives that Alpine omitted.
The omitted information is
found in the Alpine support files for each of these SARs.
These
alleged deficiencies in the SAR narratives fall into seven
categories.
Before addressing each of the claimed deficiencies,
the SEC’s allegation that Alpine was required to file each of
these SARs is assessed.
A. Mandatory Filing
The issue of whether Alpine was in fact required by law to
file the 1,593 SARs it did file became significant during the
parties’ briefing of the preliminary summary judgment motion.41
Here, the SEC asserts that Alpine was required by law to file
each of these SARs.
See 31 C.F.R. § 1023.320(a)(2) (describing
when a SAR must be filed).
The SEC advances a two-part test to
determine whether the duty to file a SAR was triggered in this
The SEC initially sought summary judgment as to 1,594 SARs
with allegedly deficient narratives. In two categories -unverified issuers and low trading volume -- the SEC withdrew
its motion as to six and seven SARs, respectively. Of these
thirteen affected SARs, twelve are also identified as having
other deficiencies. One SAR (item number 511; SAR number 299),
however, does not have any other identified deficiency.
Accordingly, the SEC’s motion now pertains to 1,593 SARs.
40
The portion of the SEC’s motion for partial summary judgment
addressed to the allegedly deficient SAR narratives was denied
because Alpine argued that it routinely filed “voluntary” SARs
and the SEC had failed to explain why Alpine was obliged to file
the exemplar SARs on which its motion was based. See March
Opinion, 308 F. Supp. 3d at 799-800.
41
44
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case because Alpine had reason to suspect that a transaction may
involve use of a broker-dealer to facilitate criminal activity.
The SEC contends that, in the circumstances at issue here,
Alpine had a duty to file a SAR where the underlying transaction
involved a large deposit of LPS, and the transaction also
involved either one of six red flags it has identified or the
transaction was conducted by a certain customer.
Each of the
1,593 SARs reported customer deposits of LPS worth at least
$5,000.
Many reported far larger deposits.42
Of those 1,593
transactions, 1,465 were cleared by Alpine for just six
customers, which the parties identify as customers A through F.43
Ranking them in order of the largest number of SARs that Alpine
filed for each of these customers, it filed 702 for A, 443 for
E, 149 for C, 116 for F, thirty-seven for D, and eighteen for B.
Of the 1,593 SARs, the SEC contends that one or more of its
identified red flags appears in the Alpine support files for
1,302 of those transactions, but is not mentioned in the SAR
narrative.
For the remaining SARs, the SEC relies on an alleged
pattern of suspicious trading, specifically, that Alpine filed a
For instance, of the 1,014 deposits listed in Table 1, the
deposits ranged in value from $5,000 to $31,619,250, the mean
value was $132,025, and the median value was $23,228.
42
This Opinion uses the term “customer” or “client” to refer to
the entity whose transaction in LPS was reported in a given SAR.
The parties largely use this formulation as well, although
Alpine also contends that its customer was the introducing
broker.
43
45
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large number of SARs for the same customer.
As described earlier in this Opinion, it is uncontested
that the market for LPS is vulnerable to securities fraud and
market manipulation schemes.
These schemes depend on the
deposit of a large amount of securities with a broker-dealer so
that those securities can enter the market.
Alpine does not
take issue with either of these propositions.
Moreover, it is not unreasonable to infer from Alpine’s
very act of filing a SAR that the reported transaction had
sufficient indicia of suspiciousness to mandate the creation and
filing of a SAR.
None of these SARs suggests that the filing
was simply a voluntary act or otherwise filed outside of
Alpine’s attempt to comply with its duties under the law.44
After all, Alpine did have some version of an AML program in
Without identifying any particular SAR, Alpine asserts that it
filed numerous voluntary SARs on transactions involving more
than 5 million shares or $50,000 worth of microcap securities.
Alpine has not identified any means by which a regulator or a
fact-finder could identify such a “voluntary” SAR. It has not
pointed to any disclosure in the 1,593 SARs that they were
“voluntary” filings. Nor has it pointed to any portion of the
SAR’s support file reflecting an analysis of the reporting
obligation and a conclusion that the SAR was not required to be
filed. Alpine’s vague and conclusory assertion is insufficient
to raise a triable question of fact as to whether any SAR was
filed voluntarily as opposed to pursuant to Alpine’s obligation
under the law to make the filing.
Moreover, more than a few of the 1,593 SARs state
explicitly that Alpine thought the transaction was suspicious.
For instance, the narrative portion of SAR 348 states that
“Alpine is filing this SAR because of the potentially suspicious
nature of depositing large volumes of shares involving a lowpriced security(ies).”
44
46
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place during the time it filed these SARs, even if Alpine
improved its AML program over time.
And, for reasons already
explained in the March Opinion, in the absence of an explicit
statement that a SAR was a voluntary filing, it would have been
unreasonable for anyone filing a SAR to assume that FinCEN or
the SEC would know that a filed SAR was simply a “voluntary”
filing, as opposed to one filed to comply with the law’s
mandates to alert regulators to suspicious trading activity.
March Opinion, 308 F. Supp. 3d at 799 & n.20.
In addition, with one exception,45 Alpine does not contest
that the red flags on which the SEC relies are indeed red flags
and that a broker-dealer should focus on these issues when
reviewing transactions.46
Accordingly, the SEC has shown that
Alpine had a duty to file each of these 1,593 SARs so long as it
also shows, as discussed below, that Alpine’s support files for
Alpine appears to contend that foreign involvement in a
transaction is only noteworthy when the foreign jurisdiction has
been designated by our government as a “high-risk” jurisdiction.
45
Alpine’s own AML procedures, which it has submitted in
connection with this motion, define a number of “Red Flags
indicating potential Money Laundering” that mirror the red flags
on which the SEC relies, such as the “customer (or a person
publicly associated with the customer) ha[ving] a questionable
background or [being] the subject of news reports indicating
possible criminal, civil, or regulatory violations,” the
“practice of depositing penny stocks, liquidat[ing] them, and
wir[ing] the proceeds,” and the customer “for no apparent reason
or in conjunction with other ‘red flags,’ engages in
transactions involving certain types of securities, such as
penny stocks.”
46
47
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the SARs contained information about a qualifying red flag.
Alpine makes two arguments in opposition to the SEC’s
assertion that it was required to file these SARs.
First,
Alpine argues that there is no liability under the law for a
broker-dealer’s failure to file a SAR, only for failing to
establish an adequate AML regime.
Not so.
While a deficient
AML program may create liability, the failure to timely file a
complete SAR may also create liability.
latter type of violation.
This case involves the
As Section 1023.320(a)(1) states, in
mandatory terms, a broker-dealer “shall file” a SAR “relevant to
a possible violation of law or regulation.”
Alpine’s position
was also expressly rejected in 2002 by the Treasury Department
when it promulgated Section 1023.320.
The Treasury Department
stated that “[a] regulator’s review of the adequacy of a brokerdealer’s anti-money laundering compliance program is not a
substitute for, although it could be relevant to, an inquiry
into the failure of a broker-dealer to report a particular
suspicious transaction.”
FinCEN Section 1023.320 Notice, 67
Fed. Reg. at 44,053.
Alpine argues as well that the “sizeable LPS transactionplus red flag” test proposed by the SEC for deposits of LPS
fails to establish the reasonable suspicion that exists in
48
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criminal law pursuant to the Fourth Amendment.47
According to
Alpine, that standard imposes on the SEC the duty to point to
“specific and articulable” facts in Alpine’s possession that
would have given it a basis to believe there was a reasonable
possibility that an entity or individual was involved “in a
definable criminal activity or enterprise.”
by Alpine.)
(Emphasis supplied
Furthermore, it asserts that it would not be
permissible under the reasonable suspicion standard for Alpine
to rely on knowledge that the entity or person had engaged in
wrongdoing in the past, had a claim pending against it, or had
settled a claim.
Alpine does not explain why a Fourth Amendment concept
should apply to the SAR reporting framework.
Applying the
standard used to determine the legality of a temporary,
In support of this argument, Alpine points to 28 C.F.R. part
23. These regulations are the Department of Justice’s “policy
standards” that are “applicable to all criminal intelligence
systems operating through support under the Omnibus Crime
Control and Safe Streets Act of 1968.” 28 C.F.R. § 23.3. 28
C.F.R. § 23.20 allows collection of “criminal intelligence
information” about individuals “only if there is reasonable
suspicion that the individual is involved in criminal conduct or
activity and the information is relevant to that criminal
conduct or activity.” 28 C.F.R. § 23.20(a). Reasonable
suspicion “is established when information exists which
establishes sufficient facts to give a trained law enforcement
or criminal investigative agency officer, investigator, or
employee a basis to believe that there is a reasonable
possibility that an individual or organization is involved in a
definable criminal activity or enterprise.” 28 C.F.R.
§ 23.20(c). Alpine’s citation to 28 C.F.R. part 23 is
inapposite.
47
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warrantless investigative detention of a person -- particularly
as Alpine defines the standard48 -- would make little sense.
Broker-dealers operate in a highly regulated industry, and both
FinCEN and the SEC have broad mandates regarding broker-dealer
reporting regimes for securities transactions.
The SAR
reporting system was designed to allow law enforcement to
monitor activity before any determination of unlawfulness is
made.
By design, the SAR regime does not depend on or require a
broker-dealer to make any finding of wrongdoing before it files
a SAR.
Section 1023.320 makes this clear:
filing is required
whenever a broker-dealer “has reason to suspect” that the
transaction involves criminal activity.
When FinCEN promulgated
Section 1023.320, it considered and rejected the view that it
would be “overly burdensome to require a broker-dealer to report
transactions that could not definitively be linked to
wrongdoing.”
44,051.
FinCEN Section 1023.320 Notice, 67 Fed. Reg. at
Congress, when it enacted the legislation that
authorized Section 1023.320, “sought to increase the reporting
of transactions that potentially involved money laundering.”
March Opinion, 308 F. Supp. 3d at 791 (emphasis supplied)
(citing the Patriot Act, sec. 302, 115 Stat. at 296-97).
Because it is irrelevant, this Opinion need not define the
contours of the reasonable suspicion standard under the Fourth
Amendment.
48
50
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Section 1023.320, accordingly, “target[s] all possible types of
illegal activity.”49
Id. (emphasis supplied).
As significantly, while Part II of the SAR Form provides
boxes to check to identify the “Type of suspicious activity,”
these are broad categories such as “Market manipulation” or
simply “Securities fraud.”
2002 SAR Form at 1.
The Form
instructions also permit a filer to check “[m]ore than one box”
and to check a box entitled “Other” with an explanation in the
narrative.
2002 SAR Form at 1-2.
The Form cannot be read to
impose on the filer the duty to select “a definable criminal
activity” when filing the SAR, or relieve a broker-dealer of the
duty to file unless it can define the criminal activity in which
the subject may be engaged.
Similarly, Alpine’s argument that a broker-dealer may not
consider the litigation history of its customer or the issuer,
or their affiliates, is flatly contradicted by the SAR Form,
which requires disclosure of “related litigation.”
Form at 3; 2012 SAR Instructions at 112.
See 2002 SAR
The SEC’s proposed
This standard is somewhat analogous to the standard that
governs whistleblower suits under 18 U.S.C. § 1514A, a provision
of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). A
whistleblower is entitled to protection under Sarbanes-Oxley if,
inter alia, an employee in his or her position would have
reasonably believed that the conduct complained of violated
federal law. See Nielsen v. AECOM Tech. Corp., 762 F.3d 214,
221 (2d Cir. 2014). A whistleblower’s complaint need not relate
“definitively and specifically” to any one statute covered by
Sarbanes-Oxley. See id. at 220-21.
49
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test -- which begins with the large deposit of LPS and adds
other red flags -- is faithful to the language and purpose of
Section 1023.320.
B. Red Flags Omitted From SAR Narratives
As noted, the SEC contends that the SAR narratives in 1,593
SARs were legally deficient because they omitted information
from the Alpine support files for the SARs that the law requires
to be included in the narratives.
The SEC also contends that,
with respect to these six red flags, their existence is another
reason that a broker-dealer would have had reason to suspect
that the transaction involved use of the broker-dealer to
facilitate criminal activity, which triggered its duty to file a
SAR.
In each instance, the SEC’s identified red flags have been
derived from the SAR Form and its instructions, as well as
FinCEN and other guidance interpreting Section 1023.320.
They
take into account the unique characteristics of the LPS markets
such as the difficulty in obtaining objective information about
issuers, the risk of abuse by undisclosed insiders, and the
opportunity for market manipulation schemes.
Alpine argues that, although it was required to scrutinize
these red flags, it had to do so in the context of all of the
facts and circumstances surrounding the transaction and consider
as well information that Alpine refers to as “green flags.”
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Even if Alpine was required to file a SAR, Alpine’s view is that
the red flag that triggered a duty to investigate and report did
not necessarily need to be disclosed in the SAR’s narrative.
There are several problems with this approach.
First, with
the very limited exceptions described below, Alpine has not
pointed to any evidence that it omitted reference to a red flag
in any particular SAR’s narrative because its examination of
other information in that SAR’s support file led it to conclude
that the red flag was, after all, not indicative of suspicious
trading activity.
Second, Alpine’s omission of a red flag from
the discussion in the narrative is also at odds with FinCEN’s
view, as expressed on the SAR Form itself, that a SAR filer
should provide in the narrative a “clear, complete and
chronological description . . . of the activity, including what
is unusual, irregular or suspicious about the transaction(s).”
2002 SAR Form at 3.
The SAR Form adds that a filer should
“[i]ndicate whether any information has been excluded from this
report; if so, state reasons.”
Id.
Finally, this contention is
undermined by an examination of those SARs that Alpine did file
that are in the record, that is, those the SEC submitted with
its partial summary judgment motion and those Alpine has
submitted in opposition to this motion.
Alpine repeatedly used
template narratives that failed to include any details, positive
or negative, about the transactions.
53
While a fulsome SAR
Case 1:17-cv-04179-DLC Document 174 Filed 12/11/18 Page 54 of 100
narrative could present a question of fact as to whether the
narrative was deficient, except in rare instances Alpine has not
shown that its SAR narratives contained sufficient information
to create a question of fact.
Each of the six red flags is now
discussed in turn.
1. Related Litigation
The SEC contends that 675 SARs omit a description of
“related” litigation from the SARs’ narratives.
The 2002 SAR
Form directs a filer to “indicate whether there is any related
litigation, and if so, specify the name of the litigation and
the court where the action is pending” in the narrative portion
of a SAR.
2002 SAR Form at 3.
Materially similar instructions
are included in the 2012 SAR Instructions.
See 2012 SAR
Instructions at 112.
Webster’s dictionary defines “related” as “having
relationship” or “connected by reason of an established or
discoverable relation.”
The relevant definition of relation is
“an aspect or quality . . . that can be predicated only of two
or more things taken together,” or a “connection.”
The SEC is
thus entitled to summary judgment to the extent it shows that
there is no question of fact as to the (1) presence of
information about the litigation in the SAR support file, and
(2) a connection between the litigation and the reported
transaction.
That connection is established where the
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litigation at issue concerns either the issuer of the securities
in the transaction or the customer engaged in the transaction.
In connection with the partial summary judgment motion, the
SEC proved that three SARs were deficient as a matter of law
because Alpine failed to include information in the SAR
narrative about related litigation.
The omitted information,
which was present in Alpine’s support files for the SARs,
indicated that the SEC had sued one customer and its CEO for
fraud in connection with asset valuations and improper
allocations of expenses, that another customer had pleaded
guilty to conspiracy related to counterfeiting, and that yet
another customer had a history of being investigated by the SEC
for misrepresentations.
See id.
In Table 2, the SEC identifies the pages from the Alpine
support files that describe the related litigation which the SEC
contends should have been disclosed in the SAR, but was not.
Alpine does not contend that the pages listed in the table do
not include descriptions of litigation or that the SARs actually
did include the information.
It does argue for most of the 675
SARs, however, that it had no duty to include the missing
information in the SAR narratives for one or more of the
following reasons.
First, Alpine appears to argue that civil litigation with a
private party is never “related” litigation, and need never be
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disclosed.
To the extent it is relying on the March Opinion for
that proposition, that reliance is mistaken.50
While civil
litigation with a private party may be unrelated to the
securities transaction, where it is “related” it must be
disclosed.
Alpine next contends that summary judgment cannot be
granted to the SEC because Alpine was diligent about obtaining
information about its customers and others.
According to
testimony given by the AML Officer who began to work at Alpine
in 2012, Alpine only disclosed litigation in its SARs where
Alpine concluded that it was “actually . . . relevant to the
activity” reported in the SAR.
In doing so, Alpine considered
“the proximity” of “the infraction” to the transaction being
reported.
As explained above, a broker-dealer must have a reasonably
effective AML compliance program and also file SARs on all
suspicious transactions.
This action involves the latter duty,
and Alpine’s efforts in 2012 and beyond to improve its AML
compliance program cannot save it from liability under Section
1023.320 and Rule 17a-8 where it did not file required SARs.
Although the March Opinion used the phrase “criminal or
regulatory history” (which described the omitted information
from the three exemplar SARs) and the phrase “related
litigation” somewhat interchangeably, the March Opinion did not
purport to change the scope of the reporting obligation
established by the SAR Form and FinCEN guidance. The duty to
report is not confined to criminal or regulatory litigation.
50
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And, as previously explained, when proving a violation of Rule
17a-8, the SEC has no burden to prove that a broker-dealer acted
with scienter.
Section 1023.320 imposes an objective test:
A
SAR must be filed when the broker-dealer has “reason to suspect”
that the transaction requires a filing.
§ 1023.320(a)(2).
31 C.F.R.
Finally, Alpine has provided no testimony
regarding its analysis and decision-making process that led it
to omit from any individual SAR the information about related
litigation that appears in any particular SAR’s support file.
Nor has it pointed to any recorded analysis in a support file
that reflects the decision that the information about the
litigation need not be included.
Its conclusory assertions
would not raise a question of fact even if its subjective intent
were relevant.
Finally, Alpine complains that the SEC has not described
separately for each of these 675 SARs why the omitted
information needed to be disclosed.
But, that exercise was
conducted in connection with the briefing of the partial summary
judgment motion so that the parties would have an early
understanding of the legal standards that would be applied to
the SEC claims regarding the many SARs at issue in this lawsuit.
To the extent that Alpine has raised a question of fact now as
to whether the omitted information identified by the SEC in
Table 2 for any particular SAR was in fact “related” litigation
57
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or did not for some other reason need to be disclosed, then
those assertions are addressed next.
Alpine has raised specific
factual disputes regarding the omissions from each of the SARs
filed by three customers and from ten other individual SARs.
a. Three Customers
Alpine contends that the SEC’s motion should be denied as
to 499 SARs that Alpine filed for transactions conducted by
Customers A, D, and E.
The assertions will be addressed in
order of the customers for which Alpine filed the largest number
of SARs.
Customer E is a capital management firm and 372 SARs in
Table 2 relate to Customer E alone.
The Alpine support files
indicate that on October 25, 2010 the SEC sued Customer E, its
former manager, and its CEO for (a) overvaluing Customer E’s
largest holdings, (b) making material misrepresentations to
investors, and (c) misusing investor funds.
This is related litigation.
The SEC has shown it is
entitled to summary judgment with respect to its claim that
Alpine was required to file SARs for every large deposit of LPS
made by Customer E and that the Customer E SARs Alpine did file
were deficient if they failed to disclose the ongoing SEC
litigation against Customer E for securities law violations.
Alpine contends, however, that it was entitled to omit
mention of the SEC lawsuit from its SARs because Alpine’s office
58
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files included a request by its affiliated introducing broker,
SCA, that Alpine make an exception to its float limit policy
despite the ongoing litigation that the SEC had filed against
Customer E.51
SCA principally argued in its request that
Customer E no longer managed money for outside investors and
that the SEC did not seek to limit the activities of Customer E
pending the outcome of the litigation.
Alpine argues that the
documents it received from SCA, and the fact that the SEC
litigation was not yet resolved, create a question of fact as to
whether Alpine acted reasonably in not disclosing the existence
of the SEC action in the Customer E SARs.
They do not.
The
duty to report related litigation extends not just to litigation
that has been resolved, but also to ongoing litigation.
The
2002 SAR Form directs a filer to indicate “any related
litigation” and to name the court “where the action is pending.”
2002 SAR Form at 3 (emphasis supplied).
A materially similar
instruction appears in the 2012 SAR Instructions.
Instructions at 112.52
See 2012 SAR
Under the objective standard that applies
to the SEC claims in this action, Alpine had an obligation to
disclose the pending SEC action as related litigation, and no
While Alpine relies on the SCA request in opposing this
summary judgment motion, that request was not found in the
support files for these SARs.
51
Tellingly, Alpine’s expert does not opine that the pending SEC
lawsuit against Customer E did not constitute “related”
litigation.
52
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reasonable jury could conclude otherwise.
The next customer at issue is Customer A.
Alpine argues
that SEC litigation against an affiliate of Customer A did not
need to be disclosed.
While Alpine makes arguments as to each
of the ninety-three SARs Alpine filed for Customer A that are
listed in Table 2, its argument ultimately has significance for
only eight of the SARs.53
Alpine failed to disclose the following in SARs it filed
for Customer A.
In November of 2013, the SEC and an entity
affiliated with Customer A settled an action that charged the
affiliate with selling unregistered securities in improper
reliance on the Rule 504 exemption.54
The president of Customer
There are ninety-three SARs for Customer A listed in Table 2.
Alpine argues that, as a general matter, it had no duty to
disclose the existence of litigation brought by private parties,
and for that reason had no duty to supplement the narrative
sections for forty-eight of the ninety-three SARs. As discussed
above, litigation with private parties may be related litigation
and Alpine has not presented evidence to raise a question of
fact that that litigation was not related litigation. For the
remaining forty-five SARs, Alpine makes the specific objection
addressed above. For thirty-seven of those forty-five SARs,
however, Table 2 refers to pages in the SAR supporting files
that describe at least one additional related legal action not
disclosed in the SARs. Accordingly, Alpine’s objection has
significance for only eight of the ninety-three SARs for
Customer A.
53
Rule 504 refers to 17 C.F.R. § 230.504. This regulation
exempts certain public offerings of securities of up to $5
million in a 12-month period from registration under the
Securities Act of 1933, 15 U.S.C. § 77a, et seq. See 17 C.F.R.
§ 230.504. The SEC, however, “retain[s] authority under the
antifraud provisions of the federal securities laws to pursue
54
60
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A was also the president of the affiliate.
As a matter of law,
this is related litigation and Alpine had a duty to file SARs to
report Customer A’s large deposits of LPS and to disclose its
affiliate’s litigation with the SEC in those SARs.
Alpine does not contend that the SEC action against the
affiliate was not “related” litigation.
Instead, it relies
again on a memorandum sent to it by its affiliated introducing
broker, SCA, which requested an exception to Alpine’s float
limit policy in connection with Customer A, to excuse the
nondisclosure.
The memorandum argued that the issues concerning
Rule 504 are “subtle” and that Customer A itself no longer
invested in such transactions.
This memorandum, which was not
in the support files for the SARs but in Alpine’s office files,
is not sufficient to create a question of material fact as to
whether the SEC action against Customer A’s affiliate, which was
also controlled by Customer A’s own president, was related to
the transaction being reported and had to be disclosed.
Summary
judgment is accordingly granted as to Customer A’s SARs listed
in Table 2.
enforcement action against issuers and other persons involved in
[Rule 504] offerings.” SEC, Exemptions to Facilitate Intrastate
and Regional Securities Offerings, 81 Fed. Reg. 83,494, 83,530
(Nov. 21, 2016). In one significant revision to Rule 504 in
1999, for instance, the SEC noted a rise in fraudulent schemes
“involv[ing] the securities of microcap companies” issued under
Rule 504. SEC, Revision of Rule 504 of Regulation D, The “Seed
Capital” Exemption, 64 Fed. Reg. 11,090, 11,091 (Mar. 8, 1999).
61
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The third customer for which Alpine attempts to raise a
question of fact is Customer D, as to whom Alpine filed thirtyfour SARs included in Table 2.
Alpine’s SAR support files
included information that Customer D’s president and others had
engaged in a mortgage fraud scheme in 2010.
Alpine has
submitted a 2011 press report which describes the scheme as
follows:
Customer D’s president convinced unsophisticated
buyers to purchase property at inflated prices, falsified loan
documents, and fraudulently secured loans that all ended in
default, costing the government millions of dollars.
The
president of Customer D owned the entity engaged in the mortgage
fraud scheme, and along with his co-defendants was required to
pay damages and penalties to the government.
Alpine contends that there are questions of fact as to
whether it had to include information about the settlement in
the SARs because Customer D’s president had committed the fraud
in connection with another entity that he owned, and the
settlement had been reached in 2011, while the SARs were filed
between three and four years later.55
These arguments do not
raise a question of material fact about the duty to include the
omitted information in the SARs.
The settlement was not so
distant in time that the highly pertinent information about a
While Alpine indicates that the settlement was reached in
2010, the press report on which it relies indicates the
settlement was reached at the end of 2011.
55
62
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fraudulent scheme in which Customer D’s president participated
had become irrelevant when these transactions occurred.
b. Ten SARs
Finally, Alpine argues that it had no duty to include
certain litigation information in the narrative section of ten
of the SARs listed on Table 2.
These are SARs 515, 612, 701,
703, 748, 859, 904, 1222, 1970, and 1971.56
The SEC has not
responded to the specific arguments that Alpine has made
regarding these ten SARs except to say that private litigation
and civil litigation can be related litigation.
But, both the
SEC and Alpine have discussed the general principles that
underlie Alpine’s arguments regarding several of these SARs.
For the following reasons, summary judgment is granted to the
SEC as to SARs 701, 1970, and 1971, and denied as to the
remaining SARs to the extent the SEC relies on the omission of
related litigation listed in Table 2.
Table 2 identifies the omission from SAR 701 as the failure
to include information about third-party litigation.
The
support files for SAR 701 reveal that a director of the issuer
had been sued for securities fraud.
Alpine argues that it has
no duty to disclose this information because the litigation is
These are the item numbers assigned to the SARs in Tables 1
through 7. Except where otherwise indicated, this Opinion uses
item numbers to identify SARs and not the SAR numbers provided
in Table 10.
56
63
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neither a regulatory nor criminal action.
wrong.
As noted above, it is
Nothing in the 2002 SAR Form or the 2012 SAR
Instructions limits the disclosure of related litigation to
regulatory actions filed by the SEC or criminal actions filed by
a prosecutor’s office.
So long as there is a connection between
the litigation and the reported transaction, there is a duty to
disclose the litigation.
No reasonable jury could find that a
pending lawsuit for securities fraud against an issuer’s
director was not connected to the deposit of a large quantity of
that issuer’s LPS.
The support files for SARs 1970 and 1971 each state that
Alpine’s customer is the subject of an ongoing SEC Action, and
that the CEO and CFO of the issuer have been “listed in civil
suit alleging securities fraud for misrepresentation.”
The
narrative for SAR 1970 reports the SEC action against the
customer but omits mention of the civil suit against the CEO and
the CFO of the issuer.
The narrative for SAR 1971 reports an
SEC “investigation” of the customer and again omits mention of
the securities fraud action against the CEO and CFO of the
issuer.
The securities fraud action against two officers of the
issuer was litigation related to the large deposit of the
issuer’s LPS, and as a matter of law Alpine had a duty to
disclose it in these SARs’ narratives.
Table 2 identifies the omission from SARs 515 and 703 as
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the failure to identify an ongoing SEC action for accounting
violations against an officer of the issuer who is identified in
Table 2 as a person with the middle initial W.57
last names of the individual are not unusual.
The first and
This description
of the officer comes directly from material contained in the
Alpine support files.
At least two other entries in those same
support files, however, indicate that the officer’s name bears
the middle initial H., not W.
Since there is a question of fact
as to whether Alpine’s support files misidentified the issuer’s
officer, summary judgment is denied.58
SAR 748 was filed in 2015 and reports that Alpine’s
customer had been named in an SEC complaint and charged with
fraud.
It omits, however, the fact that the CEO of the issuer
had been charged with a kickback scheme in 2001, which is
fourteen years earlier.
Given the passage of time, a question
of fact exists as to whether the 2001 litigation was
sufficiently related to the 2014 transaction to require Alpine
to include it in the SAR.
Table 2 indicates that SAR 859 did not disclose information
This same problem appears to arise with respect to SAR 612,
but the version of Table 2 submitted to the Court does not
include the complete notice of deficiency. Therefore, summary
judgment is denied as to SAR 612.
57
In opposition to the motion for summary judgment, Alpine has
offered search results appearing in other SARs’ support files
which appear to indicate that the SEC action was brought against
the person with the middle initial W.
58
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about a broker.
According to SAR 859’s support file, an
“unrelated” broker was “in litigation for investing client’s
money” in the issuer without disclosing risks associated with
LPS.
Without more information about how the litigation relates
to the transaction reported in the SAR, summary judgment is
denied.
Lastly, Table 2 indicates that SARs 904 and 1222, which
reported transactions that occurred in 2011 and 2012, omitted
information from their support files regarding the CEO of the
issuer -- the same individual in both SARs.
That CEO had
disgorged almost $75,000 in settlement of a 1994 SEC action for
violating Section 57(a)(1) of the Investment Company Act of 1940
through sales than occurred in 1988.59
Given the passage of time
between the events described in the support files and the
transactions in the SARs, summary judgment is denied.
c. Summary
The SEC is entitled to summary judgment as to 668 SARs in
Table A-2.
As to those SARs, the SEC has shown both that Alpine
was required to file those SARs, and that the filed SARs were
deficient due to the omission of information contained in the
Alpine support files that is identified in Table 2.
Alpine has
Section 57(a)(1) of the Investment Company Act of 1940, 15
U.S.C. § 80a-56(a)(1), prohibits the sale of certain securities
to a business development company by persons closely affiliated
with the business development company.
59
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identified a question of material fact as to the following seven
SARs, as to which the SEC’s motion is denied:
SARs 515, 612,
703, 748, 859, 904, and 1222.
2. Shell Companies or Derogatory History of Stock
The SEC claims that 241 SARs listed in Table 3 were
deficient for failing to disclose derogatory information
regarding the history of a stock, including that the issuer was
a shell company or formerly a shell company.
Other types of
derogatory information include such things as the issuer’s
frequent name changes and trading suspensions.
The SAR Form requires a filer to provide “a clear, complete
and chronological description” of the suspicious activity,
“including what is unusual, irregular or suspicious about the
transaction(s).”
2002 SAR Form at 3.
FinCEN has identified the
“inability to obtain . . . information necessary to identify
originators or beneficiaries of wire transfers” as an example of
suspicious activity that should be disclosed in a SAR.
Shell Company Guidance at 3-5.
FinCEN
FinCEN guidance also explains
that a company being a “suspected shell entit[y]” is one of
several “common patterns of suspicious activity.”
Guidance at 5.
SAR Narrative
Although “most shell companies are formed by
individuals and businesses for legitimate purposes,” FinCEN
counsels that “a SAR narrative should use the term ‘shell’ as
appropriate.”
FinCEN Shell Company Guidance at 5.
67
For these
Case 1:17-cv-04179-DLC Document 174 Filed 12/11/18 Page 68 of 100
reasons, the March Opinion concluded that “[a]ny complete
description [in a SAR narrative] of the facts responsive to the
Five Essential Elements” should include “the presence of a shell
company” in a transaction.
308 F. Supp. 3d at 802.
In its preliminary motion for summary judgment, the SEC
identified three SARs as exemplars of this type of deficiency.
One SAR omitted that the issuer of the deposited stock was a
shell company.
Another omitted that the issuer had been a shell
company within the last year.60
A final omitted information that
the issuer was not current in its SEC filings, that no company
website was found for the issuer, and that the over-the-counter
market’s website for the issuer marked its stock with a stop
sign.
Id.
All of the omitted information was found in the
Alpine support files for those SARs.
Id.
In opposition to this portion of the SEC’s motion, Alpine
has submitted its own table, which lists information in the
support file for SARs which, Alpine contends, rebuts the SEC’s
claim that it had a duty to include the omitted derogatory
information identified by the SEC in Table 3.
Alpine’s table
and its arguments in opposition to this portion of the SEC’s
motion fall into three broad categories.
Alpine first contends that the March Opinion did not hold
The SAR’s support file included a handwritten notation “within
last year” in response to the question “Is the issuer, or was it
ever, a shell company?” on its “Deposited Securities Checklist.”
60
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that Alpine had a duty to disclose in its SARs that the issuer,
as opposed to the customer, was a shell.
Alpine is wrong.
Indeed, in each of the three instances described in the March
Opinion, Alpine’s SARs were deficient because Alpine failed to
disclose derogatory information about the issuer.
Id.
The SEC
now seeks to apply that ruling to transactions in which over
$5,000 worth of LPS were deposited with Alpine.
The SEC has
carried its burden to show both that Alpine was required to file
SARs for such transactions in which there was derogatory
information about the customer or issuer, and that the filed
SARs were deficient for failing to disclose that either is a
shell company.61
As already discussed, use of shell companies is
a hallmark of certain market manipulation schemes.
Alpine was
required to disclose large deposits of LPS issued by shells.
Alpine next argues that the SEC has failed to carry its
burden of showing that Alpine must always disclose that an
issuer was once a shell corporation.62
Alpine is correct.
In
support of this motion, the SEC has not offered any argument or
expert testimony addressed to the significance of an issuer’s
Alpine appears to argue as well that it did not need to
disclose that an issuer was a shell when the support file
confirmed that the issuer had filed Form 10-Qs or 10-Ks. Those
filings did not relieve Alpine of the duty in transactions of
the nature at issue here to disclose that the issuer is a shell.
61
Alpine calculates that the SEC has identified 103 SARs as
deficient for failing to disclose that the issuer was once a
shell company.
62
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former status as a shell company, or attempted to explain for
how long or in what circumstances such former shell status
remains relevant to the SAR reporting regime.63
Therefore,
summary judgment is granted as to the SARs in Table 3 where the
issuer was a shell company when the transaction occurred or had
been a shell company within one year preceding the transaction.
The third and final category of omitted negative
information concerning issuers that Alpine contests includes
frequent name changes by an issuer, trading being suspended on
an issuer’s security, the issuer having a “caveat emptor”
designation, the issuer having sold unregistered shares, and the
issuer having been delisted.
Table 3 apparently includes 113
SARs in which derogatory information of this kind was omitted.
These types of derogatory information may indicate that the
issuer is engaging in unlawful distributions of securities or is
attempting to evade requirements of the securities laws.
Neither Alpine nor its expert suggest otherwise.64
Accordingly,
While the preliminary summary judgment motion included as an
exemplar a SAR in which Alpine omitted to disclose that the
issuer had been a shell company within the year preceding the
transaction, the SEC has given no indication that the many SARs
which it lists as deficient for their failure to disclose that
the issuer was a “former” shell or “possibly former” shell were
similarly cabined in time.
63
Alpine does complain that the SEC has highlighted instances of
“frequent name changes” by an issuer without referring to any
law, regulations, or guidance about the relevance of name
changes to securities law violations. The SEC has relied on
64
70
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Alpine had a duty to file SARs for the deposits of over $5,000
worth of LPS for such issuers, and to include the derogatory
information in the 113 SARs identified by the SEC in Table 3.
Instead of disputing the significance of this derogatory
information, Alpine opposes summary judgment on these 113 SARs
by arguing that the support files included information showing
that the issuers were “current” in their SEC filings of Forms
10-K and 10-Q and had freely tradable securities under SEC Rule
144.65
This additional information does not create a question of
fact as to whether Alpine was required to file these SARs and
include the derogatory information identified by the SEC in
these SARs’ narratives.
An issuer’s compliance with Rule 144 or
its SEC reporting duties did not relieve Alpine of the duty to
comply with its SAR reporting obligations.
3. Stock Promotion
The SEC claims that the narratives in the fifty-five SARs
listed in Table 4 were deficient for failing to include
this Court’s description of the relevant law in the March
Opinion, and that description is sufficient to encompass this
type of derogatory information, which would have given Alpine
“reason to suspect” that the transaction involved use of the
broker-dealer to facilitate criminal activity. 308 F. Supp. 3d
at 801-02.
Rule 144, 17 C.F.R. § 230.144, provides a safe harbor for
certain sales of restricted securities. See generally SEC v.
Kern, 425 F.3d 143, 148 (2d Cir. 2005). Rule 144 is an
interpretation of Section 4(a)(1) of the Securities Act of 1933.
See id.
65
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information that there was a history of stock promotion in
connection with the LPS being deposited with Alpine.
The
unreported stock promotion activity occurred between one week
and eighteen months before the SAR was filed.
The fifty-five
SARs reported deposits ranging from 500,000 to 800 million
shares of LPS.
The SEC has shown that Alpine was required to
file those SARs that reported a substantial deposit of LPS where
the stock promotion occurred within six months of the deposit
and to include information about the stock promotion activity in
the SAR narrative.
Summary judgment is therefore granted on
forty-one of the fifty-five SARs.
The SAR Form’s instructions explain that the SAR narrative
must “[p]rovide a clear, complete and chronological description
. . . of the activity, including what is unusual, irregular or
suspicious about the transaction(s).”
2002 SAR Form at 3.
According to FinCEN, a common scenario of suspicious trading
activity is a substantial deposit of a low-priced and thinly
traded security, followed by the systematic sale of that LPS
shortly after the deposit.
SAR Activity Review, Issue 15, at
24; March Opinion, 308 F. Supp. 3d at 792.
The systematic sale
of shares is typically accompanied by systematic promotion of
the stock.
Indeed, promotion of an issuer’s stock is a classic
indicator that a low-priced stock’s price is being manipulated
as part of a pump-and-dump scheme.
72
See March Opinion, 308 F.
Case 1:17-cv-04179-DLC Document 174 Filed 12/11/18 Page 73 of 100
Supp. 3d at 803 (citing Fezzani v. Bear, Stearns
F.3d 18, 21 (2d Cir. 2013)).
& Co., 716
In administrative proceedings, the
SEC has found an entity’s AML program inadequate where it did
not file SARs for transactions where an issuer was “the subject
of promotional campaigns at the time of the customer’s trading.”
In re Albert Fried & Co., SEC Release No. 77971, 2016 WL
3072175, at *5 (June 1, 2016).
In its preliminary summary judgment motion, the SEC
identified three Alpine SARs that described sizable deposits of
LPS, but included only a barebones narrative in the SARs.
The
SARs failed to disclose information regarding stock promotion
contained in the Alpine SAR support files that had occurred
between two weeks to two months before the reported transaction,
including information found in Google search results,
screenshots of websites, and news articles.
F. Supp. 3d at 803.
March Opinion, 308
Alpine acknowledged in connection with that
motion practice that evidence of stock promotion activity is
relevant if connected to a pump-and-dump scheme.
Id.
In opposition to this current motion, Alpine does not
dispute that it had a duty to include in its SAR narratives
information in its possession about stock promotion activities
when it was reporting a sizeable deposit of a LPS.
It argues,
however, that it was only required to disclose stock promotion
73
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activities when the stock promotion was “ongoing.”66
Neither the SEC nor Alpine has directly addressed when a
history of stock promotion is stale for SAR reporting purposes.
The one month cut-off which Alpine proposes in opposition to
this motion is clearly too short a period.
Pump-and-dump
schemes can last months or even years, and promotion campaigns
can occur in several cycles over that period.
See, e.g.,
Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60,
63-64 (2d Cir. 2012) (describing “cycles of fraudulent trading
of securities” over “approximately three years” with different
phases including stock promotion, misrepresentations to
investors, and fraudulent transactions through Cayman Island
hedge funds and investment manager); SEC v. Cavanagh, 445 F.3d
105, 108-09 (2d Cir. 2006) (promotional campaign beginning in
December 1997, with manipulated trading extending to March
Alpine also objects to the March Opinion’s reliance on the
SEC’s 2016 decision in In re Albert Fried & Co., SEC Release No.
77971, 2016 WL 3072175, at *5 (June 1, 2016), for the
proposition that stock promotion can constitute suspicious
activity. It argues that the Fried decision was issued after
the events at issue here. Alpine’s objection is not well
founded. Stock promotion has been recognized as a hallmark of
pump-and-dump schemes involving LPS since at least the 1990s.
See, e.g., SEC Charges 41 People in 13 Actions Involving More
than $25 Million in Microcap Fraud, SEC News Release 98-92, 1998
WL 779347 (Sept. 24, 1998) (manipulation of stock price of
microcap companies). The dissemination of false information to
promote a stock has been a component of securities fraud for
much longer, of course. See, e.g., Berko v. SEC, 316 F.2d 137,
139 (2d Cir. 1963) (Marshall, J.) (describing distribution
through mails of “deceptive and misleading” “brochures” to
promote securities).
66
74
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1998); United States v. Salmonese, 352 F.3d 608, 612-13 (2d Cir.
2003) (pump-and-dump schemes involving, inter alia, bribing
brokers to sell securities at inflated prices over seven month
period).
Alpine’s search results indicating promotional
activity within at least the six months preceding the deposit
could focus law enforcement attention on ongoing schemes and
allow law enforcement to connect the recent promotional activity
with stock manipulation.
In light of the legal authority cited above, the SEC will
be granted summary judgment for those SARs, which account for
roughly forty-one of the fifty-five, in which the SAR support
files had evidence of stock promotion activity occurring within
six months of the large-scale deposit of the LPS with Alpine.
While a fact finder must determine the outer limit, stock
promotion activity that occurs within six months of these
deposits constituted, as a matter of law, a red flag requiring
disclosure in the SAR.
Despite arguing that it had no duty to report stock
promotion activity unless it had occurred within one month of
the deposit reported in its SARs, Alpine did not disclose that
near contemporaneous activity in over a dozen of its SARs.67
It
An examination of the pages in the support files cited by the
parties indicates that Alpine filed about fifteen SARs without
reporting that stock promotion activities had occurred within
roughly a month of the sizable deposit of LPS with Alpine.
67
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asserts that it used a second screening test to do so.
It
contends that it chose to omit mention of the stock promotion so
long as it uncovered “no connection” between that activity and
the customer who deposited the shares.
As an example, Alpine’s
support file for SAR 9 -- a SAR that reported a deposit of LPS
worth $9,497 -- indicates that a generically named LLC (the
“Promoter”) had been compensated for a promotion of the issuer’s
stock by another generically named entity, and that the
Promoter’s website had been registered by yet another
generically named LLC.
The support file also indicates that,
because Alpine did not have evidence that the Promoter was
“connected” to Alpine’s customer, it determined that it need not
refer to the stock promotion activity in the SAR.
As discussed above, a broker-dealer has a duty to file a
SAR when it has reason to suspect that the transaction may
involve use of the broker-dealer to violate the law, and to
include in the SAR a “clear” and “complete” description of
activity that is “unusual, irregular, or suspicious” about the
transaction.
See 2002 SAR Form at 3.
Alpine’s lack of
information about the ownership and control of generically named
LLCs involved in promotion of the LPS did not relieve it of the
duty to report the stock promotion activity.
After all, the SAR
Form instructions also require filers to “[i]ndicate whether any
information has been excluded from this report; if so, state
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reasons.”
Id.
4. Unverified Issuers
The SEC claims that thirty-six SARs listed in Table 5 were
deficient for failing to disclose in their narratives the
problems with the issuers described in the Alpine support files
for the SARs, even though millions of shares of that issuer’s
LPS were deposited with Alpine.68
The SEC contends that Alpine
improperly omitted that the issuer had an expired business
license, a nonfunctioning website, or no current SEC filings.
Summary judgment is granted to the SEC on all thirty-six SARs.
The SAR Form requires filers to provide a “clear” and
“complete” description of what is “unusual, irregular or
suspicious about the transaction(s).”
2002 SAR Form at 3.
FinCEN has explained that suspicious activity “common[ly]”
includes transactions involving “parties and businesses that do
not meet the standards of routinely initiated due diligence and
anti-money laundering oversight programs (e.g.,
unregistered/unlicensed businesses).”
SAR Narrative Guidance at
5.
The SEC’s preliminary motion for summary judgment
identified three SARs in which Alpine reported deposits of
Table 5 lists forty-two SARs. In its reply papers, the SEC
withdrew its motion as to six of these SARs. The SEC continues
to assert, however, that those six SARs are deficient for
reasons other than those listed in Table 5.
68
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millions of shares of LPS.
The SARs failed to disclose that
Alpine was either unable to locate a company website for the
issuer or that the issuer’s corporate registration was in
default.
The March Opinion concluded that a SAR reporting a
deposit of an enormous quantity of LPS without also disclosing
such problems with the issuer was deficient as a matter of law.
308 F. Supp. 3d at 804.
Alpine contends that it only needed to report that the
issuer’s website was not functioning, that its business
registration was in default, or that it had no current SEC
filings if Alpine could not confirm that the issuer was an
“active and functioning” entity.
Alpine asserts that it was
able to confirm that each of the issuers for these SARs was an
“active” company based on an examination of the issuer’s SEC
filings, documentation that its stock was “free trading” for the
purposes of SEC Rule 144, or indications that the issuer was not
a shell company.
Each SAR must, of course, be examined individually.
that is done, Alpine’s defense evaporates.
larger point that is relevant here.
When
But, there is a
If a SAR must be filed for
a transaction, then the information casting doubt on the
legitimacy of the issuer must be included in the SAR.
And that
is so even when other information also exists that suggests the
issuer may be a functioning business.
78
The duty of the filer is
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not to weigh and balance the competing inferences to be drawn
from the negative and the more reassuring pieces of information,
but to disclose “as much information as is known to” the filer
about the subjects of the filing.
22, at 39.
SAR Activity Review, Issue
The SAR Form advises filers to “[i]ndicate whether
any information has been excluded from this report; if so, state
reasons.”
2002 SAR Form at 3.
The SEC has carried its burden of showing that Alpine had a
duty to file each of these thirty-six SARs.
Each of these SARs
reflects the deposit of between 110,000 and 164 million shares
of LPS,69 and Alpine’s files contained information casting doubt
on the legitimacy of or the regularity in the business of the
issuer of the deposited LPS.
In filing the required SARs, Alpine had a duty to disclose
that the issuer’s business license was expired, its website was
nonfunctioning, or there were irregularities in its SEC filings.
Such information is part of the “Five Essential Elements” of a
transaction.
The fact that the issuer’s shares may be tradable
under a different SEC regulation does not change the scope of
the SAR reporting obligation.
The mean number of shares was 28,892,783, and the median was
14,200,000. The value of the transactions ranged from $5,710 to
$112,200, with a mean of $18,285 and a median of $10,764.
69
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5. Low Trading Volume
The SEC claims that 700 SARs70 listed on Table 6 were
deficient for failing to disclose the comparatively low trading
volume in the LPS that these SARs reported were being deposited
with Alpine.
In the 700 SARs, the number of deposited shares
was substantial, often amounting to millions of shares, and it
represented at least three times the average daily trading
volume of the stock, measured over the three months preceding
the deposit.
For the following reasons, summary judgment is
granted to the SEC as to the SARs where the ratio between the
shares deposited in a single transaction was at least twenty
times the average daily trading volume over the three-month
period prior to the deposit.71
The SAR Form requires a filer to “[d]escribe conduct that
raised suspicion,” and to do so with a “clear, complete and
chronological” description of the suspicious activity.
Form at 3.
2002 SAR
One type of transaction that may be suspicious is a
“[s]ubstantial deposit, transfer or journal of very low-priced
Table 6 lists 707 SARs. In its reply papers, the SEC withdrew
seven of these SARs from its motion, reducing the total from 707
to 700. Because six of these seven SARs are also alleged to be
deficient in other ways, the number of SARs subject to this part
of the SEC’s motion for summary judgment is reduced from 1,594
to 1,593.
70
Twenty times reflects roughly one month’s trading volume,
calculated on the basis of four weeks of five trading days per
week.
71
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and thinly traded securities.”
at 24.
SAR Activity Review, Issue 15,
The March Opinion held that when such a deposit has been
made the SAR must report each of three elements:
“the
substantial deposit of a security, the low price of the
security, and the low trading volume in the security.”
Supp. 3d at 804.
308 F.
The March Opinion granted summary judgment to
the SEC as to three SARs where the reported deposits were for
share amounts that ranged from fifty to 600 times the average
daily trading volume of the LPS.72
Id. at 805.
In response to the instant motion, Alpine first argues that
low trading volume is not a red flag because it is a “hallmark
of microcap stocks.”
That argument misses the point.
trading volume need not be disclosed in a vacuum.
Low
But, if there
is a deposit of LPS that is substantial in comparison with the
average volume of trading in that LPS, then there is a duty to
report both the size of the deposit and the relatively thin
trading volume.
Alpine next questions why comparatively thin trading volume
must be reported when the differential between the volume of
shares in a transaction and the average trading volume is only
300%, as opposed to some other figure.
The SEC has not provided
The March Opinion listed the figures for the deposits and
average trading volume correctly in the summary of the SARs, but
incorrectly referred later in that Opinion to one ratio as ten.
Compare 308 F. Supp. 3d at 786-87 (correctly stating figures)
with id. at 805 (giving incorrect deposit and ratio for SAR M).
72
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expert testimony or any other basis to conclude that a ratio of
three is the appropriate demarcation for reporting the
transaction and the trading volume in LPS.
The SEC relied on
three exemplars in connection with the preliminary summary
judgment motion, and their ratios were fifty, 100 and 600.73
Those ratios are extraordinary and do not provide a basis to
conclude that the SAR reporting requirements are only triggered
by such extreme ratios.
But, given the undeveloped evidentiary
record, a trial will be necessary to determine the precise ratio
that triggers the duty to include the average trading volume.
It is safe to find, however, that a failure to report the
average trading volume when the substantial deposit exceeds a
month’s worth of the average daily trading in the LPS will
always be a violation of the SAR reporting obligations.
Therefore, the summary judgment motion is granted to the extent
that Alpine failed to include in its SAR narratives the trading
volume for a substantial deposit of LPS when the deposit was
greater than twenty times the average daily trading volume,
measured over the three months prior to the deposit.
When such
a ratio is present, Alpine had a duty to file the SAR and to
report the average trading volume as well.
Alpine did not argue in opposition to that motion, and does
not argue now that those ratios, or even the ratio of ten
reported in the March Opinion, were too low to trigger SAR
reporting requirements.
73
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Finally, Alpine argues that it had no obligation to add
information about trading volumes to its SARs because such
information is already available to law enforcement.
argument is meritless.
This
Other categories of information, such as
related litigation, are publicly available but must be included
in the SAR.
The purpose of a SAR is to provide law enforcement
with timely and “complete” access to information that permits
them to understand what is suspicious about the reported
activity.
2002 SAR Form at 3.
Nothing in the SAR reporting
regime provides the exception which Alpine suggests for
information available to the government through other means.
See March Opinion, 308 F. Supp. 3d at 789-94.
6. Foreign Involvement
The SEC moves for summary judgment as to 289 SARs where a
foreign entity or individual was involved in the transaction
reported by Alpine in its SAR, but Alpine did not disclose that
foreign involvement in the SAR narrative.
For the following
reasons, the SEC is granted summary judgment as to these 289
SARs.
The 2002 SAR Form directs filers to “[i]ndicate” in the SAR
narrative “whether U.S. or foreign currency and/or U.S. or
foreign negotiable instrument(s) were involved.
If foreign,
provide the amount, name of currency, and country of origin,”
and to include in the narrative “foreign bank(s) account
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number(s),” and “passport(s), visa(s), and/or identification
card(s)” belonging to an involved “foreign national.”
Form at 3.
2002 SAR
The 2012 SAR Instructions direct filers to include
essentially the same information in the SAR narrative.
SAR Instructions at 111-12.
See 2012
Both sets of instructions also
state that filers should “identify” in the narrative “the
country, sources, and destinations of funds” if funds have been
“transfer[red] to or from a foreign country.”
In addition, SAR
guidance issued by FinCEN directs a filer to “[s]pecify” in the
SAR narrative
if the suspected activity or transaction(s) involve a
foreign jurisdiction. If so, provide the name of the
foreign jurisdiction, financial institution, address
and any account numbers involved in, or affiliated
with the suspected activity or transaction(s).
SAR Narrative Guidance at 4.
In its preliminary motion for summary judgment, the SEC
submitted three SARs in which Alpine reported enormous deposits
of LPS.
One SAR listed a foreign address for the customer but
omitted from the SAR narrative information about foreign
correspondent accounts that were involved in the underlying
transaction.
Another SAR provided a foreign address for the
customer in the subject information boxes of the SAR, but
omitted in the narrative any reference to the foreign nature of
the transaction, much less that the country in question has been
identified as a jurisdiction of primary concern for money
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laundering activity.
The last SAR did not disclose any foreign
involvement with the transaction, omitting that the deposited
shares were purchased by the customer through a transfer of
funds to a foreign bank account.
The March Opinion held that,
regardless of whether a SAR filer has disclosed a foreign entity
in other parts of the SAR, “a broker-dealer is required by law
to include information constituting the Five Essential Elements
and foreign connections to the transaction in the narrative
section of any SAR that the filer is required to file.”
308 F.
Supp. 3d at 806.
Alpine was required to file each of the 289 SARs.
Each
reported a substantial deposit of LPS and had a foreign
connection to the transaction.
As summarized above, the SAR
Form instructions required Alpine to include information in the
SAR narrative that described the foreign connections to the
transaction.
Alpine first argues that it need only include information
in the SAR narrative about foreign involvement in the
transaction where the foreign jurisdiction is a “high-risk”
jurisdiction.
This argument may be swiftly rejected.
Neither
the SAR Form instructions nor FinCEN guidance creates a
distinction between high-risk and other foreign jurisdictions.74
If the involvement of a high-risk jurisdiction in a
transaction were the only factor triggering the filing of a SAR,
74
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Alpine next argues that its inclusion of foreign addresses
in other parts of the SAR form obviated the need to disclose a
foreign connection to the transaction in the SAR narrative.
so.
See id.
Not
The SAR Forms contain specific instructions that
apply to the narrative portion of a SAR.
Those instructions
specifically require the disclosure in the narrative of foreign
connections to the transaction being reported.
Finally, Alpine argues that in three of the 289 SARs it
adequately disclosed the foreign connection to the transaction
in the SAR narratives because it disclosed that its customer had
acquired the shares from a resident of Belize.
In none of these
SARs did Alpine indicate in the narrative, however, that
Alpine’s customer was itself a foreign entity.
The narratives
are accordingly deficient, and the SEC is entitled to summary
judgment as to these three SARs as well.
7. Five Essential Elements
Finally, the SEC seeks summary judgment as to approximately
295 SARs listed on Table 1 filed by Alpine in connection with
large deposits of LPS made by three customers.75
It is
then of course, the involvement of that kind of foreign
jurisdiction may be of importance. Such a distinction between
foreign jurisdictions is not relevant here, however, given the
unusual nature of the transactions, i.e., the substantial
deposit of LPS.
The SEC asserts that 1,105 SARs listed on Table 1 were
deficient because they omitted from their narratives the
75
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undisputed that these SARs omitted the basic customer
information in the SAR narrative which FinCEN refers to as the
Five Essential Elements.
Alpine contends that it had no duty to
file these SARs, and therefore, the deficiencies in their filed
SARs do not violate the SAR regulations.
Each of these SARs reported a large deposit of a LPS.
In
addition, each relates to a deposit by one of three Alpine
customers: Customers A, C and E.
As described above, Customers
A and E had significant “related” litigation.
For Customer A,
there was a settled SEC action with an affiliate of Customer A,
whose president was also the president of Customer A.
For
Customer E, there was an ongoing SEC action against Customer E,
its CEO, and its former manager.
The SEC has carried its burden of showing that a reasonable
broker-dealer would have had reason to suspect that substantial
deposits of LPS by Customers A and E involved use of the brokerdealer to facilitate criminal activity.
The SEC has shown,
therefore, that Alpine had a duty to file the SARs it filed for
these transactions by Customers A and E and that it is entitled
information known as the Five Essential Elements. Because
Alpine does not dispute that assertion, all that is in dispute
in this part of the motion is whether Alpine had a legal duty to
file each of these SARs. For all but approximately 295 of these
1,105 SARs, the SEC relies on the identified the six red flags
discussed above to support its argument that it has shown that
the SARs were required filings. Accordingly, this section of
this Opinion is necessary for at least the remaining 295 SARs.
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to summary judgment as to those SARs.
The SEC further contends that the twenty-two SARs filed for
large LPS deposits by Customer C were required filings.76
If the
SAR narrative reported that Alpine was filing the SAR “because
of the potentially suspicious nature of depositing large volumes
of shares involving a low-priced security” there cannot be a
credible argument that the Alpine SARs were “voluntary” SARs.
If there are SARs, however, that do not include such notice, or
its equivalent, then there is a question of fact as to whether
Alpine was required to file these SARs.
In arguing that Alpine was required to file these SARs, the
SEC does not appear to be relying on any evidence that either
Customer C or the issuer of the LPS reported in the SAR was the
subject of “related” litigation or derogatory information.
Instead, it appears to rely on the fact that Customer C
frequently conducted other transactions in which the issuers of
the securities had had significant regulatory or criminal
actions brought against them.
The SEC has not explained why
Customer C’s transactions in LPS issued by questionable issuers
would give a broker-dealer a reason to suspect that all of
Customer C’s LPS transactions involved questionable issuers.
149 of the 1,593 SARs that are listed in Table 10 were filed
by Alpine for transactions conducted by Customer C. The SEC has
alleged a separate narrative deficiency as to all but twentytwo, however.
76
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There is accordingly a question of fact as to whether Alpine was
required to file SARs for Customer C where the only information
missing from the narrative is the Five Essential Elements and
the narrative does not include a statement that Alpine
considered the transaction suspicious.
V. Deposit-and-Liquidation Patterns
In its second category of claims, the SEC seeks summary
judgment as to 3,568 sales of LPS listed in Table 11.
In each
instance, Alpine filed a SAR reflecting a large deposit of a LPS
but did not file a SAR reflecting the sales that followed those
deposits.
The SEC contends that, when a SAR is filed on a large
deposit of LPS, a broker-dealer is obligated to file new or
continuing SARs when the shares are sold within a short period
of time.
In Table 11, the SEC has identified 1,242 deposit-and-
liquidation groups, which together include 3,568 individual
sales of shares, each sale being worth $5,000 or more.
For the
following reasons, the SEC’s motion is granted as to 1,218
groups where Alpine failed to file a SAR reporting a customer’s
sales after the customer had made a substantial deposit of LPS
in a thinly traded market.77
Alpine challenges as arbitrary the inclusion of twenty-four
groups (groups 639, 860, 861, 862, 885, 886, 887, 888, 890, 904,
906, 959, 962, 996, 1195, 1196, 1203, 1228, 1229, 1230, 1231,
1232, 1241, and 1242) among the 1,242 groups identified by the
SEC. The SEC has not responded to that challenge. Therefore,
this Opinion is addressed to the remaining 1,218 groups.
77
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Section 1023.320 requires reporting of a suspicious
transaction “if the transaction or a pattern of transactions of
which the transaction is a part meets certain criteria.”
C.F.R. § 1023.320(a)(2) (emphasis supplied).
31
FinCEN guidance
explains that the “[s]ubstantial deposit . . . of very lowpriced and thinly traded securities,” followed by the
“[s]ystematic sale of those low-priced securities shortly after
being deposited” is suspicious and subject to reporting under
Section 1023.320.
(footnote omitted).
SAR Activity Review, Issue 15, at 24
Such patterns, in FinCEN’s view, present
“red flags for the sale of unregistered securities, and possibly
even fraud and market manipulation.”
Id.
In its preliminary summary judgment motion, the SEC
provided evidence that one customer deposited over twelve
million shares of a LPS in February 2012, and then sold in
twelve transactions ten million shares in February and March of
2012.
That pattern repeated itself in April through August
2012, with the customer depositing a very large number of shares
in the same LPS and within weeks selling a large proportion of
those shares in a series of smaller transactions.
Alpine had
timely filed SARs of the deposits, but not for the sales.
The
SEC also provided evidence that two other customers had each
deposited a large number of physical certificates of a LPS, and
then sold an almost equal amount of shares in that LPS in a
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series of small transactions over the weeks immediately
following the deposits.
The March Opinion granted summary
judgment to the SEC, conditioned on it establishing that its
charts of the trading activity were accurate.
See 308 F. Supp.
3d at 808-09.
Alpine first argues that not every liquidation following a
deposit is suspicious, and therefore it was not required to file
SARs for liquidations just because it filed a SAR to report the
deposit.
If the liquidations followed the deposit of a large
number of shares of LPS, then the precedent recited above
forecloses this argument.
This pattern of transactions is a
hallmark of market manipulation.
Alpine next argues that the filing of SARs for every such
liquidation would flood regulators with thousands of additional
SARs and be unworkable.
But, as the SEC points out, multiple
transactions may be reported in a single SAR.
In fact, Alpine
reported multiple transactions in some of the SARs it submitted
in its opposition to this motion.
Both the 2002 SAR Form and
2012 SAR Instructions allow filers to describe multiple
transactions; they direct filers to describe suspicious
activities and transactions.78
Moreover, SAR reports are
See, e.g., 2002 SAR Form at 3 (describing the narrative as the
“[e]xplanation/description of suspicious activity(ies)” and
directing filers to disclose “what is unusual, irregular or
suspicious about the transaction(s)”); 2012 SAR Instructions at
78
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generally only due to be filed within thirty days of the
transaction.
See 31 C.F.R. § 1023.320(b)(3).
Thus, all the
sales occurring within a thirty-day period could be reported
together with the deposit.
The SEC estimates that roughly 40%
of the unreported liquidations occurred before Alpine had even
filed a SAR for the deposit.79
Many of the liquidations
reflected in Table 11 are packed tightly together, occurring
several times in a single day, multiple times in a single week,
and many times in a single month.
Alpine next argues that its AML review of the deposits
confirmed that the shares were freely tradable, and that was all
that the law required.
It explains that, since its business
model treated each deposit as if the deposited LPS would be sold
shortly thereafter, its careful review of the need to file a SAR
for the deposit fulfilled all of its obligations under the law.80
Filing a SAR for a suspicious deposit of LPS did not relieve
111-12 (directing filers to, inter alia, “[d]escribe the conduct
or transaction(s) that caused suspicion” in the SAR narrative).
Alpine does not present an alternative calculation for this
phenomenon, but complains that the SEC has failed to explain,
among other things, whether the 40% figure includes sales that
occurred the same day as the deposit and includes as well every
sale tethered to a deposit so long as at least one of those
sales occurred before the SAR was filed.
79
Alpine adds that it filed SARs as well for certain patterns of
market manipulation, such as matched trading and wash trading.
These SARs are not the subject of the SEC’s lawsuit against
Alpine.
80
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Alpine of the duty to file SARs for other suspicious
transactions, including potentially the sale of the deposited
shares.
Moreover, as already explained, the duty to maintain an
AML program does not excuse compliance with the separate duty to
file SARs for suspicious transactions.
Notice, 67 Fed. Reg. at 44,053.
See Section 1023.320
Alpine violated Section
1023.320 if it failed to file a SAR when it was required to do
so.
Alpine next contends that, if this portion of the SEC’s
motion is granted, that should result in a finding that Alpine
violated its SAR reporting obligations at most 1,242 times, and
not 3,568 times.81
The former figure reflects the number of
deposit and sale groups the SEC has identified in Table 11; the
latter represents the number of sales.
For the following
reasons, this Opinion assumes that the maximum number of
violations is, as adjusted to remove certain groups to which
Alpine has made a specific objection, 1,218.
The duty that Alpine is alleged to have violated is the
duty to file a SAR.
Those missing SARs would have reported
Alpine also argues that the correct number should fall to a
few hundred because all deposits and sales by a customer in a
single issuer’s securities should be grouped together, instead
of creating a separate group for the liquidations that followed
deposits closely in time. That argument is rejected. The
pattern at issue that was suspicious and that Alpine failed to
report was the liquidation in multiple transactions of a large
deposit that had been reported in a SAR filed by Alpine, not all
sales of a particular LPS.
81
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patterns of suspicious trading.
The text of Section 1023.320
states that “[a] transaction requires reporting” if it is
conducted through a broker-dealer and the broker dealer “has
reason to suspect that the transaction (or a pattern of
transactions of which the transaction is a part)” involves
illegal activity.
31 C.F.R. § 1023.320(a)(2).
The Section
1023.320 Notice explains FinCEN’s view that
[t]he language in the rule requiring the reporting of
patterns of transactions is not intended to impose an
additional reporting burden on broker-dealers.
Rather, it is intended to recognize the fact that a
transaction may not always appear suspicious standing
alone.
Section 1023.320 Notice, 67 Fed. Reg. at 44,051.
Alpine
therefore had a duty to file SARs that reported each sale that
was part of a suspicious pattern.82
The SEC has carried its
burden of showing that Alpine violated the law by failing to
file such SARs.
Because Alpine failed to file any such SARs, as
opposed to filing incomplete SARs that reported some but not all
of the sales in a pattern, resolution of how many SARs Alpine
should have filed would require a fact intensive examination of
the patterns of sales that followed deposits.
At a minimum, the
SEC has shown that Alpine failed to file at least 1,218 SARs to
Alpine also had the option of filing continuing SARs, an
option provided on the SAR forms that the parties do not
discuss. See SAR Activity Review, Issue 1, at 27; FinCEN, SAR
Activity Review: Trends, Tips & Issues, Issue 21 (May 2012), at
53, https://www.fincen.gov/sites/default/files/shared/sar_tti_
21.pdf; 2012 SAR Form at 1.
82
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report the suspicious pattern of sales following the large
deposits of LPS.
Finally, Alpine objects to eleven groups identified in
Table 11 on the ground that the sales occurred too long after
the deposit to require Alpine to file a SAR.83
The SEC’s motion
is granted as to seven of these eleven groups; Alpine has raised
a question of fact as to groups 1207, 1225, 1236, and 1237.
A
description of two of the seven groups is sufficient to explain
why Alpine has failed to raise a material question of fact as to
its duty to file a SAR to report the pattern of trading in the
seven groups.
Group 1221 begins with a deposit of 8- million84 shares of a
LPS, with a value of $1- million, in early February 2012.
In
early March 2012, Alpine filed a SAR reporting the deposit.
Six
weeks after the deposit and two weeks after the SAR was filed,
Alpine’s customer began to sell shares.85
All told, the customer
sold 7- million shares, or 87% of the initial deposit, in six
These are groups 4, 1207, 1220, 1221, 1224, 1225, 1226, 1227,
1233, 1236, and 1237.
83
“8- million” indicates an amount between 80 million and
89,999,999. These less than precise numbers are used in this
Opinion, as they were in the March Opinion, to accommodate the
secrecy of the SAR reporting regime.
84
On four consecutive days, Alpine’s customer made sales in
amounts of 1- million shares, 7 million shares, 5 million
shares, and 1- million shares. Five days later, the customer
sold 1- million shares. One week later, the customer sold 1million shares.
85
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transactions over fifteen days.
Group 1233 consists of one deposit of 1- million shares
valued at $1- million in mid-November 2012.
the next day.
selloff.86
Alpine filed a SAR
Nineteen days later, the customer began the
Over a three-month period, Alpine’s customer sold 7
million shares in nineteen separate transactions, 78% of the
deposit.
VI. Late-Filed SARs
The SEC moves for summary judgment as to 251 SARs
identified in Table 12 that were filed long after the
transactions they reported, often more than six months later.
Section 1023.320 directs that “a SAR shall be filed no later
than 30 calendar days after the date of the initial detection by
the reporting broker-dealer of facts that may constitute a basis
for filing a SAR under this section.”
§ 1023.320(b)(3).
31 C.F.R.
Summary judgment is denied due to the SEC’s
The first sale was of 5- thousand shares. One month after the
first sale, the customer sold 2-- thousand shares. The next
day, the customer sold 2-- thousand shares and 9- thousand
shares in two separate transactions. The next week, the
customer made five sales in three days, of 2-- thousand shares,
9- thousand shares, 3-- thousand shares, 1-- thousand shares,
and 1-- thousand shares. The following week, the customer made
four sales in two days, of 5-- thousand shares, 2-- thousand
shares, 4-- thousand shares, and 2-- thousand shares. Two weeks
thereafter, the customer made three sales in three days, in
amounts of 5-- thousand, 5-- thousand, and 1 million shares.
The following week, the customer made two sales of 6 thousand
and 1 million shares. Three weeks later, the customer made one
sale of 1 million shares.
86
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failure to show that Alpine had an obligation to file these
SARs.
See March Opinion, 308 F. Supp. 3d at 800.
To establish Alpine’s duty to file each of these SARs, the
SEC relies on the fact that Alpine filed the SARs to comply with
an order from FINRA to do so.
This is not sufficient to
establish for purposes of this lawsuit that Alpine had an
independent duty to file the SARs.87
VII. Failure to Maintain Support Files
The final portion of the SEC’s motion is directed to
Alpine’s failure to maintain support files for 496 of its SARs.
The motion is granted.
A broker-dealer is required to maintain support files for
its SARs.
Section 1023.320(d) provides as follows:
Retention of Records. A broker-dealer shall maintain
a copy of any SAR filed and the original or business
record equivalent of any supporting documentation for
a period of five years from the date of filing the
SAR. Supporting documentation shall be identified as
such and maintained by the broker-dealer, and shall be
deemed to have been filed with the SAR. A brokerdealer shall make all supporting documentation
available to FinCEN or any Federal, State, or local
law enforcement agency, or any Federal regulatory
authority that examines the broker-dealer for
compliance with the Bank Secrecy Act, upon request; or
to any SRO that examines the broker-dealer for
compliance with the requirements of this section, upon
the request of the Securities and Exchange Commission.
Thirty-four of the SARs reported transactions worth less than
$5,000. Generally, there is no duty to file SARs for
transactions in an amount less than $5,000. See 31 C.F.R.
§ 1023.320(a)(2) (requiring reporting if a transaction “involves
or aggregates funds or other assets of at least $5,000”).
87
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31 C.F.R. § 1023.320(d) (emphasis supplied).
Section 1023.320
is cast in mandatory terms and requires two acts: the
maintenance of records for five years after a SAR is
filed, and the production of such records at the
request of a federal regulatory agency such as the
SEC. A failure to either maintain or produce a SAR’s
supporting documents . . . violates Section 1023.320
and, as a result, violates Rule 17a-8 as well.
March Opinion, 308 F. Supp. 3d at 811-12 (citation omitted).
The SEC’s evidence of Alpine’s failure to maintain files
rests on the efforts the SEC made in 2015 and 2016 to collect
the Alpine support files for SARs under investigation.
In 2016,
Alpine produced some of the files that the SEC subpoenaed, but
no support files for the 496 SARs that are the subject of this
motion.
The SEC provided Alpine with a list of SARs for which
it could not locate any support files in the Alpine document
productions.
Alpine’s counsel represented during a November
2016 telephone call that some support documents “simply don’t
exist.”
Despite additional requests during the discovery period
for Alpine to supplement its document production and produce the
missing files, Alpine has not produced the missing files.
In opposition to this motion, Alpine has not provided
evidence that it ever provided the SEC with the support files
for these 496 SARs.
arguments.
Instead, Alpine makes two meritless
First, it seeks a Rule 56(d) deposition of the SEC
affiant who has described the search through the Alpine document
98
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productions in a fruitless effort to locate the missing support
files.
If Alpine maintained the missing files, then all it
needs to do to defeat this prong of the SEC’s motion is to
produce them now,88 or identify by Bates number the copies it
produced to the SEC in 2016.
It has done neither.
A deposition
of the person who conducted the SEC search is unnecessary.89
See
Paddington Partners v. Bouchard, 34 F.3d 1132, 1138 (2d Cir.
1994).
Second, Alpine argues that a failure to maintain files is
not a violation of Rule 17a-8, which is the Rule upon which the
SEC’s action is predicated.
Alpine argues that the SEC’s
recourse, if any, was to sue for a violation of 17 C.F.R.
§ 240.17a-4(j) (“Rule 17a-4”).90
Rule 17a-8, however, requires a
If Alpine produced the missing files now, then the SEC may
have a different application regarding the untimely production,
but this portion of the summary judgment motion regarding the
failure to maintain the files would likely have been mooted.
88
The request for the deposition is also untimely. At the time
the Court issued the March Opinion on the preliminary summary
judgment motion, the Court gave Alpine an opportunity to request
this very deposition after it had completed its review of the
March Opinion. Following that review, Alpine made other
discovery requests, but did not renew its earlier request to
depose this affiant.
89
90
Rule 17a-4(j) provides that broker-dealers must
furnish promptly to a representative of the [SEC]
legible, true, complete, and current copies of those
records of the [broker-dealer] that are required to be
preserved under this section, or any other records of
the member, broker or dealer subject to examination
under section 17(b) of the [Exchange] Act.
99
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broker-dealer to comply with “the reporting, recordkeeping and
record retention requirements of chapter X of title 31 of the
Code of Federal Regulations,” the chapter containing Section
1023.320.
17 C.F.R. § 240.17a-8.
Section 1023.320(d), which is
quoted above, is titled “Retention of Records”.
§ 1023.320(d).
31 C.F.R.
Accordingly, the SEC has shown that Alpine
violated the record-retention provision of Section 1023.320 by
showing that Alpine was unable to “make [496 SAR support files]
available to” the SEC in 2016.
Id.
This constitutes a
violation of Rule 17a-8.
Conclusion
The SEC’s July 13, 2018 motion for summary judgment is
granted in part.
The SEC has shown as a matter of law that
Alpine violated Rule 17a-8 repeatedly by filing required SARs
with deficient narratives, failing to file SARs for groups of
suspicious liquidation transactions, and failing to maintain and
produce SAR support files.
Dated:
New York, New York
December 11, 2018
____________________________
DENISE COTE
United States District Judge
17 C.F.R. § 240.17a-4(j).
100
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